Are you considering the purchase of an investment property? Before you buy, there are many things you should consider first. In our latest post, we will discuss the things people most often overlook when buying a property for investment.
Unless you are paying in cash, you will likely need to get a conventional loan when purchasing an investment property. To do this, you will need a 20% downpayment. You may also choose to find a partner to work with. If you go this route, make sure to have an iron-clad agreement. Have everything in writing from how to handle repairs to evictions to selling the property. Another option would be to invest in a Real Estate Investment Trust or REIT. This allows you to pool your money with other investors so you can attain the benefits of owning real estate without having to deal with any of the maintenance.
You fixed costs go beyond the mortgage. You should also consider the price of homeowners insurance, property taxes, average utility and routine maintenance costs. This can include items such as landscaping, pool service, and pest control. There are items that need to be replaced routinely such as a/c filters and smoke detectors. All of these items, no matter how small they seem, will add up quickly, greatly affecting the expenses you have for the home.
You will also need to set money aside for the unplanned for things that inevitably occur. Things like the water heater breaking, or the washer no longer turning on. You need to be prepared to quickly fix a leaky roof or pipe so it doesn’t create more damage to the home. While insurance will cover many things, others you should be prepared to cover on your own.
First-time investors will sometimes assume that the property will be occupied 12 months out of the year. This isn’t always the case. Don’t base your numbers on 100% vacancy. Learn about what other properties are doing in your area, and go from there.
Repair & Rehab
You should have a good grasp on construction timeframes and costs if you will need to do work on the property. The costs for repairs usually exceed the original budget, so plan accordingly. A goal should be to add additional value to the property. If you are able to do some of the work yourself, all the better. Adding unique and widely appealing details to a property will increase the value you can sell or rent it for.
Look at the numbers. Even if you love a neighborhood, that doesn’t mean it is growing on paper. You should look at census reports as well as things such as job growth and new construction permits being pulled. Is the area really growing at the rate you would like to see to achieve the returns you are after? Take a look at what other properties are doing nearby. How much are they renting for? Or if you are looking to resell, what’s the average number of days on the market for homes like yours? To put it bluntly, don’t assume that because you like a location or house that everyone else will too!
There are risks with any investment. Will you have bad tenants? Will the property sit vacantly? You might have to deal with an eviction which could cost a fortune in legal fees. There is always a risk, but as long as you have a solid exit strategy in place, you will always be able to be prepared for the unexpected.
As they say, most millionaires got there by using real estate. When smart investments are made, there is no limit to the profits you can see. Start small, learn the ropes and thoroughly research every decision you make. By working with like-minded people and investment professionals, you can easily begin a venture in real estate investment.