Have you thought about owning an investment property? The return can be lucrative, but it’s important to understand the financial and time commitments a rental entails. Before you hand over the down payment, here are five key considerations for buying an investment property.
1. Are you ready for this?
Being a landlord is big deal. Purchasing and managing a rental property should run like a business. Prior to taking the plunge, consider all of the moving pieces. For example, make sure you’re equipped to treat the property like a part-time job. Tenants will call you with home issues, and you need to be ready to fix problems at the drop of a hat. Be prepared to put in many hours as you learn the ins and outs of property management.
2. Consider how much you’ll need to borrow
If you’re ready to manage a rental, your next step is to figure out how to make your investment property a reality. Start by chatting with a mortgage professional to learn more about loan options and interest rates. You’ll want to come out of the conversation with a clear understanding of what you qualify for. This will not only narrow down your home search but will also give you a clear grasp of your borrowing position. This is important because you never want your monthly payments to be higher than expected. After all, the goal is to make a profit off of the future property.
One sure fire way to quality for a better rate is to put down 25 percent. If this seems like a lot of money, keep in mind that in most instances you’ll need to put at least 20 percent down to secure traditional financing anyway. This is because obtaining an investment property loan is harder than getting one for your personal home. Be prepared to hand over a significant amount of documentation on your finances and background to your lender.
3. Research the location
It will be very important to have a team of experts on your side as you find your property. Chat with real estate professionals, investors and mortgage specialists to get to know your market. They’ll have information on property taxes, trends and other neighborhood statistics. You’ll also need to do a bit of your own research while keeping future tenants in mind. What would they look for in a community? Good school districts, low crime rates, parks and a family-friendly atmosphere? Or will they desire an area with nightlife, lively parks, coffee shops and restaurants? Location will be a key consideration during the buying process.
4. Estimate your return
Once you find a desirable property, it’s time to get down to the details. Calculate how much you will be spending per month versus how much you can expect to charge in rent. There are many online tools to compute a fair monthly fee for tenants. You may also be able to access the property’s rental history, which is a good place to begin. Compare those rates to others in the area.
Don’t cut yourself short. Too often people assume that if the rent they are charging covers their loan, they will be just fine. However, there are other fees to take into account. For instance, if you don’t escrow for property taxes and insurance in your mortgage payment, you’ll want to include both of those bills in your overall budget. And you’ll want to consider HOA fees if you purchase a condo or home that has a homeowners association.
It’s also smart to allocate money or a specialty fund for maintenance, repairs and risks. After all, you’ll never know what property issues may pop up. Even worse, your property could sit empty between renters, lowering your overall return.
5. Be realistic
If you’re careful with your research, feel confident in the team you’ve surrounded yourself with and have found a great opportunity, owning a rental property may just be for you. Like any investment, keep your expectations realistic. While the rental may not produce big monthly paychecks to begin with, there certainly is the opportunity for growth.
If you are considering buying a rental property and want an expert opinion on the home buying process, please contact our mortgage team. We are here to help. You may also try our mortgage affordability calculators or sign up for a complimentary seminar.