Crucial Considerations: What to Consider When Buying an Investment Property
If you are buying an investment property, here are some of the most important considerations that will guide you to the right choice.
Real estate property can create a sustained income for decades. But not every property is worth buying. For that matter, not everyone is a good candidate for buying an investment property.
To increase your chance of success, there are some important considerations you should take into account.
What to Consider When Buying an Investment Property
There can be a lot to consider when buying an investment property. To simplify a complex decision, you can divide the considerations into three broad categories: 1) personal, 2) property, and 3) the loan.
Before even shopping for an investment, let alone actually purchasing a property, it’s best to think about your personal situation and comfort level with real estate investing.
Your Comfort Level with Being a Landlord
There is a lot involved with being a landlord. You need to maintain the houses, complete repairs, find tenants, collect checks, and respond to issues swiftly. Before buying an investment property, it helps to think about your comfort level with all of these tasks. Can you perform maintenance? Can you care for the yard? Can you work with people to ensure payment?
Your Comfort with Risk
To own investment property is to assume risk. Yes, the potential returns can be significantly higher, but it’s also possible that an investment, for a variety of reasons, could fall flat on its face. To successfully own investment property, you have to be comfortable with the risky business of real estate. If you prefer something less volatile, stocks and bonds make a much better option, but if you want a hands-on investment that could bring an excellent financial future, real estate may be right for you.
The Legal Obligations of a Landlord
The landlord-tenant legal relationship can be complex, confusing, and sometimes frustrating. But, for obvious reasons, there are laws set up that help protect tenants while also helping honest landlords conduct business in a legal and ethical manner. It’s essential that you understand your rights as a landlord, but it’s just as important (more so, perhaps) that you understand the tenant’s rights.
Laws will vary by state, county, and city, but there are laws regarding security deposits, lease details, eviction notices, and more. If your investment property is going to be on the rental market, it’s essential that you become well informed on the laws in your area.
If you decide that buying an investment property is the right choice for you personally, you should now understand the important considerations for choosing the right property…
Rentability of the Property
It’s simple: will someone want to use this property? Is it a place where someone can safely live or set up a business? There are, of course, many factors that play into rentability, starting with location. If the property is in a vibrant downtown area, you are more likely to find motivated tenants. If it’s in a rural setting, your pool for potential renters is much slimmer.
The quality and layout of the property also matters. The property you choose should have the right layout so someone can actually live in and enjoy the property.
How Much Will the Property Bring?
If the property has potential, you next need to determine how much it will bring on a monthly or annual basis. A market assessment, often completed with the help of a professional, can help you determine exactly how much cash income will be generated by a specific property.
How Many Repairs are Needed?
Many investors want to find the most affordable, bottom-priced property on the market. Thinking they can fix the property with a small additional investment, they buy a “fixer-upper” and quickly discover that the cost or repairs is destroying their potential profits.
First of all, if you are buying your first investment property, find a house that needs minimal repairs; you can still find bargains, just not one that needs extensive repair work. Find one priced below the market that needs minimal repair work and you’ll set yourself up for financial success.
Loan and Financing Considerations
Many people will use a loan to finance their investment property. If you go with this strategy, you should place a particular emphasis on two important considerations…
The interest rate on your loan can make a profound difference on the overall affordability of your purchase. There are certainly other factors, but a low interest rate can increase your chances of success when you use a loan to buy an investment property.
Just how much can it make a difference? Using our online mortgage calculator, we can compare two exact loans with different interest rates. Let’s just assume a 30-year fixed-rate loan for $400,000. (We’ll leave the downpayment off and just go with a $300,000 loan to keep it simple.) With a 6% interest rate (high, but not outlandish for an investment loan), the monthly principle and interest (P&I) payments would be $2,398. Lower the rate to 5%, and the P&I drops to $2,147. If you can get the interest down to 4%, you’re looking at P&I payments of $1,910. As you can see, the interest rate needs to be considered, as it could make or break your profitability.
Another factor that need to be considered when using an investment-property loan is the required downpayment. Downpayments are a way for lenders to reduce their risk; the more a borrower can bring upfront, the less statistical risk a lender assumes.
Some lenders working with certain types of properties may require downpayments as high as 10 or even 20%. This can equal tens of thousands of dollars, capital that you may not have or may not wish to tie up into a non-liquid property. It’s important to consider the downpayment requirements, but don’t forget that a large downpayment can reduce monthly costs.
Dedicated Support When You are Buying an Investment Property
If you need help choosing the right loan for buying an investment property, contact our staff today. We’ll make sure you have all the information required to make an informed choice!