Buying an investment property is a significant step for any real estate investor. While it is among the most expensive assets, it is the best way for real estate investors to generate passive income. However, like any other property purchase, you should learn some important basics of building a real estate empire. Novice investors should know how to find good investment properties, get approved for a mortgage, and attract tenants. Below are a few tips for buying your first investment property.
Is an Investment Property the Right Choice?
Before focusing on how to buy your first investment property, begin by evaluating if this investment is right for you. Owning a real estate property comes with high operating costs and mortgage. It also involves handling tenants who determine the success of your investment. Surprisingly, investing in rental properties is less risky than in stock markets.
However, taking a significant gamble on rental properties comes with opportunities for bigger rewards. After purchasing the property, you can manage them yourself or hire property managers who charge 8% to 12% of rental income. While they reduce your revenue, they provide various services, such as maintenance and repairs, screening tenants, and following up on late rent.
That aside, you should be versed with landlord-tenant laws, landlord insurance, homeowner’s insurance, and other important provisions.
Tips for Buying a Rental Property
1. Organize Your Financing
Unless you have sufficient savings or inheritance to purchase rental properties for cash, you should apply for rental property loans. Fortunately, the path to being approved for these loans is the same as mortgage applications for primary residences, albeit with slight differences. For instance, rental property loans have high-interest rates because of the high risks involved. Nonetheless, you have the option of traditional mortgage loans or VA and FHA loans.
Underwriting standards for rental property loans are also strict. Most lenders scrutinize the applicants’ credit score, debt-to-income ratio, and down payment. Ideally, you should have a credit score of 620 and above for better rates. Most lenders accept a down payment of 15 to 25% and a DTI of 75%.
2. Look for Expert help Finding Rental Property
With financing sorted, the next crucial step is finding the right rental property that can guarantee returns. Important factors to consider when searching for rental properties to purchase include:
- General population and job growth rates
- Neighborhood ratings – determined by employment rates, access to public transport links, and quality of schools
- Percentage of occupied households
- Increasing rental prices and a decline in vacancy rates
- Property taxes
Online property sites, such as Excelsior Realty, Zillow, and Trulia, can ease your search.
3. Understand Returns from Rental Properties
Most people purchase investment properties blindly. It is vital that you understand how rental property returns are determined. You should calculate the ROI of your investment property before committing to the purchase. You should know the following to calculate rental property
- Estimate the annual rental income
- Estimate the annual operating fees incurred through repairs, insurance, taxes, and property management charges
- Subtract expenses from rental income to forecast cash flows
- Calculate the total cash invested, which is the down payment plus the upfront cash required for repairs and maintenance
- Divide the annual cash flow by the total cash invested to find the ROI
With these key metrics, you can use online calculators to forecast your return on investment.
4. Should you Self-manage or Hire a Property Manager
Managing your rental properties is more involving than it seems. From finding and screening potential tenants and collecting rent to conducting immediate repairs, these tasks may prove involving, especially if you have other engagements. That aside, you should also comply with the Fair Housing Act and state and local landlord-tenant laws and conduct periodic inspections.
Most real estate investors prefer hiring local property managers to relieve them of these duties. Delegating to property managers allows investors to benefit from passive rental income without the hands-on tasks. Before hiring a property manager, ensure the company has the following:
- A valid license
- Good historical performance
- Extensive experience based on the number of years in business
- Fees and pricing structure
- Data and reporting capabilities
While there’s a lot to consider when buying an investment property, you should begin by conducting extensive research. Don’t worry, Minnetonka real estate is here for you. Evaluate housing prices in your neighborhood and start saving for a significant down payment. You should also focus on improving your credit score to increase your chances of being pre approved for a mortgage. Get in touch with us right away to find out more!