Were you aware that individual investors own around three in 10 rental properties? That’s according to Census projections. It’s also worth noting that a supply deficit and rising prices are the two main challenges for investors eyeing residential properties this year.
People typically add investment properties to their investment strategies because of the passive income potential. Buying a residential property and renting it out to reliable tenants means a steady stream of passive monthly income week after week, year after year, and decade after decade. You can understand the appeal even more when considering that the property valuation will rise. But that doesn’t mean you should rush ahead with an investment before thinking things through.
Here’s a look at eight things you should consider before buying your first investment property.
1. Don’t Base Decisions on Emotion
Making decisions based on logical reasoning rather than pure emotion is essential. If you find a residential property and fall in love with it, don’t allow that to cloud your judgment. It’s better to go into the process determined to make a purchasing decision from a business investment perspective. Do your homework and make an offer based on sound business sense.
2. Consider the Down Payment
It’s also important to weigh down payment requirements. If you have bought a family home, you’ll only need a down payment of around 3% of the house’s purchase price. But the down payment requirement is much higher if you’re buying an investment property.
Purchasing your first investment property means tabling a down payment of no less than 20%. You might be wondering about the discrepancy. It’s because mortgage insurance does not apply to investment real estate.
3. Choose a Relatively Cheap Home for Your First Investment Property
While you might envision getting your dream rental property, it’s best to take it easy the first time around. Even after buying your investment property, you’ll find there’s a lot to learn. So, find a property priced far below what you could technically afford. Remember that the purchase price is just one cost associated with buying an investment property.
You’ll also need to invest in repairs and remodeling before finding tenants. Then there are the property taxes you’ll have to pay. Spending below your means also means minimizing your risk profile, which makes sense should the real estate market tank.
4. Watch Your Debt Load
How much debt do you have? If you’re carrying significant debt, you should focus on paying that off before investing in real estate. Buying and maintaining investment property is a serious undertaking. The last thing you should do, if you’re carrying substantial debt, is purchase an investment property.
5. Figure Out Costs and Profits
Before you go house hunting, you need to sit down with a pen and paper or calculator and add up the costs associated with buying and maintaining a rental property. You’ll also want to determine how much money you’ll bring in monthly. When you know what you can make in rental income and what your monthly expenses will be, you’ll be able to make an informed decision on whether or not a particular property is a good investment for you. The last thing you’ll want is an investment property that is more a curse than a blessing. Don’t allow poor planning to jeopardize your foray into real estate investing. Proper planning is vital.
6. Who’ll Handle Day-to-Day Operations
Who will handle the day-to-day operations of your rental property? Can you wear all the hats needed not only to buy, but also to manage your residential real estate? You’ll need to be able to do the following:
- Advertise and market your rental property
- Conduct background checks on prospective tenants
- Collect rent and follow up if anyone’s late
- Keep on top of maintenance requirements
- Find contractors to conduct repairs
- Pick up the phone whenever tenants call to make complaints or requests
That’s a lot to handle–and it’s one reason many property owners hire property management companies. These service providers can manage the day-to-day operations so that you don’t have to do everything independently.
Suppose you want to focus on investing in worthwhile investment properties. In that case, it’ll be advantageous to find a property manager to assist you with the administrative side of things.
7. Research, Research, and More Research
Do you know whether it’s a buyer’s or a seller’s market? Do you know which locations are best for investors with your investment time frame? You’ll want to do some serious research before purchasing your first investment property. By the time you get a realtor and look at some investment properties, you should already be clear about what you want. Also, don’t hesitate to pick the brain of your realtor. You can get answers to your questions that way.
8. Weigh the Risks
It’s also essential to weigh the risks before embarking upon any investment. Consider the following possibilities:
- The investment property you buy might require more repairs than you had expected
- Property taxes could climb
- You might have a hard time attracting tenants
- You might have tenants who end up not paying on time or at all
You must consider the potential negatives and determine if you can deal with them if they happen.
Buying an investment property can be great if you want to diversify your investment strategy. But before you go all in and pick up your first piece of real estate, you’ll want to consider the above-mentioned things. One of the most important things you can do is hire a property management firm to help manage the day-to-day operations so you don’t become overwhelmed.
We’re here to offer our expertise if you’d like help managing your investment property. Even experienced real estate investors can struggle to stay on top of all the duties required of landlords.
But outsourcing management of your investment property will ensure your real estate asset and your tenants are well taken care of. You won’t have to spend every waking hour managing your property since our range of services covers all the bases. If you’d like to find out how we can be of service to you, get in touch. We’ll be happy to show how we can help.