Buying an investment property can be an intelligent financial decision. If you do it right, you can get a strong return on your investment through passive income and tax breaks and grow your overall equity. But bringing in a significant return isn't a guarantee.
There are quite a few factors that go into choosing the right property, getting your finances in order, and ensuring that the timing is right.
The location of your investment property is critical. If you are thinking about purchasing a home to rent out, you have to think like a renter and be sure that you find a home that people will want to rent. It may seem backward to consider the location first and the property second. The "right" property in the wrong location won't get you the rentals you are hoping for. An experienced Realtor® has their finger on the pulse of the local market and can help you find a property worth purchasing.
You may not have considered the differences in down payment requirements for a second property versus when you're purchasing your first home. Instead of getting away with only putting down 5% to 10%, you typically need to put down at least 20%. Investment properties don't qualify for mortgage insurance, so you will need to make sure your credit score, income, and debt to income ratio are at optimum levels to be eligible for a lower down payment.
Investment properties provide a passive stream of income.
THE ONE PERCENT RULE
The one percent rule helps investors decide if a property is worth buying. The rule states that each month, you should be able to bring in no less than 1% of the price you paid for the property, including any repairs or renovations. You can also consider this rule long-term; maybe you want to invest in an up-and-coming neighborhood that will eventually give you a significant return on your investment. Whatever you decide to do, aim to keep your mortgage payment at or below one percent of your investment so that you're not paying out more than you're gaining.
FIXED & VARIABLE COSTS
There are always additional expenses associated with owning and maintaining a property. The fixed annual costs include property taxes, homeowner's insurance, and general upkeep costs. Variable expenses are harder to anticipate but make sure you leave some wiggle room in your budget for unexpected repairs.
As with all things in real estate, there are sometimes unforeseen risks. You may not have the rental interest that you anticipated, or you could end up having expensive initial repairs. Your property taxes could go up, or the local economy could change. Having an experienced Realtor® that knows your region, knows how the market is changing and can offer you market advice is an invaluable resource.
The Realtors® of Mike Thomas Associates are experienced advisors who can help you navigate the process of buying an investment property and make the best purchase possible. Give us a call today, and let us help you make a smart investment.