Five Important Steps To Buying An Investment Property
Vice President, Mortgage Lending
Putting your foot in the door of the real estate investment market can be both exciting and nerve-wracking. Like anything new, it will take time and research to get a handle on how things work to ultimately reach the goals you desire. But once you do get a grip on the learning curve, you will find that the results can be very rewarding.
Before you buy your first property, consider these five essential steps you’ll need to take.
Prepare For The Down Payment and Interest Rates
Financing the purchase of an investment property is much different than purchasing an owner-occupied home. As an investment, you want to maximize your balance sheet, so should try to put at least 20% down payment to eliminate the expense of Private Mortgage Insurance (PMI). The minimum down payment is 15% for a one-unit property, but PMI can be expensive. Multi-unit properties can require an higher down payment and lenders also require you to have reserves. So you need to be prepared and save.
Interest rates are different for investment properties as well. They are typically a bit higher, so make sure you consult with your lender for an accurate quote based on your specific scenario.
Decide If You Want To Rent or Flip The Property
It is important to know which method you intend on pursuing from the start: Renting or flipping the property. Renting and flipping an investment property require different strategies that you should know to be successful with your venture.
Flipping a home requires much more upfront cash and energy to buy, fix, and sell the home. If you are able to sell quickly, this route offers a faster profit. But beware, most mortgage lenders will request that you keep your loan for a minimum 6 months. Lenders lose any revenues earned for an early payoff, so for the super-quick flip, you may be best using an existing line of credit or cash for the home purchase.
Renting however, requires less expensive and fewer repairs, but it will take much longer to make your initial investment back. Rental properties require long-term commitments for maintenance and finding tenants, along with offering long-term, more static income.
Understand The Local Economy
Knowing the neighborhood and surroundings of the property can go a long way and be very beneficial to you. It is especially important to think long-term if you intend to rent an investment property. Is there a lot of room for growth and new employment, or does the area rely more on dying industries? Ideally, you want an economy that appeals to quality buyers and attracts potential tenants in your price range.
Research is always important and valuable to utilize, but nobody understands a city like a local. Between learning the ropes of renting or flipping a property and learning about a new area and their economy can be very overwhelming. This is why it is often recommended to start out by investing in a property near where you already live, or in an area that you know very well.
Research The Market
Once you have a building in mind, you’ll then want to take a look at similar properties in the area. Look through local listings to get an idea of the going rental rate or asking price for comparable properties. What’s the going rental rate? Will you cash flow positive as it compares to your mortgage payment? Is it worth a breakeven or negative cash flow if you feel the home value is going to improve?
Dig into the details to get a better look at the current market trends. Are rental properties listing lots of incentives or do they mention a waitlist when you call? If real estate agents and rental managers are eager to offer incentives, that often indicates a competitive market with too few renters. If you’re waitlisted or average prices seem higher than usual, it’s more likely to have potential lookers than there are available properties.
Factor In Repairs And Other Costs
The approach to considering if a property needs repairs depends on whether you intend to flip or rent the property. For either route, you will want to bring in a home inspector who can find problems that aren’t blatantly obvious to the average eye.
If you plan to flip, you will want to estimate the value of the after-repaired property and determine roughly how much the property could sell for after all the necessary renovations are made.
You will then want to look at repair costs. Factor in what you can do on your own, and repairs that will require professional labor. As you calculate the price of purchase and repairs, don’t forget to also include property taxes, closing and holding costs. Depending on how long it takes to sell, you could end up losing money on the flip if you don’t take these things into account.
If you plan to rent, it is best to avoid major, expensive repairs because renting is a long-term investment plan. Normally with long-term investments, you want to minimize your upfront costs.
Remember to keep these things in mind before purchasing an investment property: Be prepared to make the down payment and find out the accurate interest rates. Make the decision if you want to rent or flip the property before you get going. Understand the local economy and the area of the property you are investing in. Give yourself an advantage and research the market you will be working in. Lastly, factor in repairs and all other costs to allow yourself to earn a profit. Knowledge is power, the more you know about your surroundings, what you are doing, and why you are doing it, the better chance you have at achieving your goal, maximizing your balance sheet and making a profit.
If you have any further questions about investment properties, contact me here or at 708-531-8324.