Investment properties, lots of people have them, maybe you want one too? They sound like a great idea, but what do you really know about acquiring and owning an investment property? Investment properties can be a great source of additional income. You just have to know where to start.
There are many options out there when it comes to investment properties and it is important to research what those are and what is the best fit for you and your goals (and how involved you want to be in the process). The most traditional investment property option is to buy a home and rent it out, collecting rent on a monthly basis. You may not make much money at first especially after expenses, however over time expect that to increase, as well as hopefully the property value. Some investors choose to buy a vacation home in an area they enjoy visiting, on the premise they can rent out the property the rest of the year to offset the mortgage payment and maybe make a profit. And then of course, a more popular option as of late, the rehab and flip investment property. Investors identify a rehab property to acquire, fix it up and then turn around and sell it for a profit. Whatever option may be right for you, there are some key factors you need to be aware of first.
What do you need to know?
- Understand the Costs – It is not just about the down payment. If you are serious about owning and managing an investment property, know the costs involved with such an undertaking. Not only will you need a down payment, there will also be closing costs, property expenses (i.e. insurance, real estate taxes, HOA fees, unexpected repair costs, etc.), a potential renovation budget and it is imperative to have cash reserves on hand for the unexpected property expense or to cover your mortgage payment in the event of potential vacancy.
- Be Realistic – Know what you can afford and be realistic about what property you have the ability to take on, budget and time wise.
- Credit Standing – Know your credit history and if you need to repair it or build up your reserves. Be organized and prepared regarding your finances and what financial documents may be required during the financing process.
- Are you Ready? Are you prepared to be a potential landlord, the headaches and challenges you may face, the time involvement you may need to take on, along with the unexpected expenses you may face?
How to prepare for your first investment property purchase –
- Build up your Savings – You will want to have enough savings on hand for both the down payment for your purchase and cash reserves for improvements and/or to cover several months of mortgage payments should you need to.
- Engage Experienced Professionals – If you are considering acquiring an investment property, it would be wise to consult an attorney about the best way to hold title to the property and potentially set up an LLC (Limited Liability Company) to protect yourself personally. In addition, find an experienced Realtor to negotiate your contract, and a Mortgage Lender or Broker with investment property experience that can get you a pre-approval letter and put you in a better position with the seller to acquire the property, along with securing the best possible loan option. Down the road, depending on your goals and if you pursue additional investment properties or multi-tenant properties, it may be smart to research property management companies.
- Do your Homework – Research properties thoroughly, and once you narrow the search, make sure you know the risks you may be taking on with a particular property. And of course, research potential financing options and sources to secure the best possible financing to facilitate the purchase.
Financing – How do investment property loans differ from a regular home mortgage?
If this is your first investment property, you may not even be aware that you will need an investment property mortgage, or a non owner-occupied mortgage as they are referred to in the lending world. Pricing as it relates to investment property mortgages is higher than if you are obtaining a mortgage for a home you intend to live in, this is due to the higher risk the lender will be taking on. The down payment you can anticipate needing is minimally 20%. If you are able to put down more, you will see the benefit of a lower interest rate typically. And be prepared for your lender to require you to have those reserves mentioned earlier on hand as a requirement of the loan.
There are multiple financing options available, depending on the type of investment property you choose. You may finance your purchase via a conventional bank loan, or if you are planning to rehab and flip the property, via a short-term fix and flip loan. Be prepared for the fees to be a bit higher if you are seeking to get the money to rehab and turn around the property quickly. Another viable option that some individuals utilize for rehabbing and flipping properties is a home equity loan against their primary residence. This gives them access to the cash they need short term to rehab the property and get it sold.
Investing in a rental or fix and flip property can be an intimidating and potentially risky venture, but if you be smart about it, do your research, save and invest in the right property, you have the potential to reap the benefits. If this is your first investment property, keep in mind, start small to get used to having an investment property and make sure it is something you can handle before you take the plunge for a larger scale rehab project or invest in managing a larger property, such as an apartment building.