What To Look For When Buying An Investment Property
To some extent, this is a reasonable reaction if this is your first time entering the world of investment properties. There are many factors to think about and a lot at stake. It’s important to have your wits about you while investing in any kind of real estate, whether it’s a holiday rental, a city condo for year-round rental, a business investment property, or anything else. To that end, we have compiled this concise guide to the most important considerations you should make when purchasing an investment property. These considerations are just a starting point for deciding whether or not to take the plunge; in the end, each scenario must be evaluated separately and in light of local trends.
You need to put your potential investment property into perspective. Beautiful as it may be, a vacation property in an unpopular area may struggle to attract guests. As such, while a fixer-upper may be a prudent investment in a highly competitive housing market like the San Francisco Bay Area (where you can recoup your restoration costs quickly), such property may actually lose you money in a less competitive market. Prioritize the property’s location over the property itself. While it may seem counterintuitive to focus on location before structure, the “perfect” property in the wrong place is probably not the appropriate property at all.
Variations in Initial Expenses
When compared to a primary residence, investment properties typically require a larger down payment. Rather than putting down as little as 10%, a normal down payment ranges from 15% to 20%. Mortgage insurance isn’t available for investment houses, and there are more stringent standards to get financing, so you’ll need a larger down payment. How much of a down payment you’ll need depends on factors like your credit history, annual income, and debt-to-income (DTI) ratio. You should, as with any property acquisition, have your finance in order before you start looking for a place to live.
Learn the Risks
Purchasing a property for investment purposes is not without risk, as is the case with any real estate transaction. You must be aware of the potential dangers.
Here are a few of the biggest risks to remember:
- You should not assume the level of rental interest that you expect.
- You could have to pay for costly maintenance out of pocket.
- An increase in property taxes is possible.
- Alterations in the local market economy are possible.
There is always the chance of having troublesome renters who will drive up your maintenance and eviction bills. Don’t dwell solely on the dangers (if everyone did that, no one would ever buy an investment property), but also don’t disregard them. No investment is risk-free, so you should prepare for the possibility of losses by including some financial leeway in your plans. One of the wisest investments you can make is in real estate. Take the time to carefully consider all of the aforementioned variables and to work with a knowledgeable advisor who can assist you handle the process and make the best choice possible.