5 Basics For Investment Properties

Buying your first investment property can be daunting, but the payoff can be huge. Owning a property and renting it out, either as a residence or holiday rental, can end up being a great source of income. When it comes to investing in real estate, the goal is to make a great return on your investment. Put simply, you want the property to at the very least cover its own costs, which may include real estate fees, closing costs, property tax, mortgage payments, utilities, maintenance, and insurance. Of course, the idea is for the property to not only cover those costs, but to eventually generate income for you. If you are considering purchasing an investment property, here are some basic things to know.

1. Ways to Make Money

   There are three main ways real estate investors make money.

   • Real Estate Appreciation: Depending on the market, your property may increase in value over the years. This can happen gradually or quickly, and the property may increase in value a great deal. It is worth doing your research and looking at trends in the market before buying to make sure you are making a good investment. If you’ve noticed similar areas increasing in value recently, you may be able to get a good idea of what makes a property appreciate in value. Real estate appreciation is easier for more experienced buyers who know what to look for in an investment.

   • Cash Flow Income: Cash flow income refers to income made directly from renting out an investment property. This could be an apartment building, or it could be office space, storage space, basically any property that generates income. If you run your cash flow income property well, this can be a good and reliable source of income.

   • Real Estate Related Income: This refers to income made from a profession related to the sale of real estate, rather than from the direct purchase and sale of investment properties. This could include a real estate broker, who makes a commision on sales made, or a rental manager, who collects a percentage of each rent collected.

2. Be Realistic

   It’s easy to get carried away when purchasing your first rental property. You may walk into a fixer-upper and let your imagination run wild, but when it comes down to it, you may not be able to afford to turn your dreams into reality.

   When buying your first investment property, it’s best to start small and move up from there. If you are new to being a landlord, you should do some research and speak to other experienced landlords. Being a landlord is demanding and time-consuming, and you should definitely be prepared before becoming one.

   Be realistic about your limitations when buying your first investment property. The first property you buy doesn’t have to be your dream property. You can always work your way up the ladder. It’s far better to start small than to go overboard and end up buried in debt, or defaulting on your loan.

3. Pay Off Your Debt

   If you have any other debt, such as student loans, or credit card debt, it may not be a good time to buy a rental property. If you are still carrying debt it will be harder to be approved for a mortgage, and you may become overwhelmed once expenses associated with the property begin piling up.

   If you have some existing debt but still think you’d like to invest in property, it’s a good idea to speak with a financial advisor or mortgage professional to see if it’s a good time for you to invest. The amount of debt you have can also affect your ability to get low interest rates, which is another reason you may want to hold off on investing until your debt is paid off.

4. Interest Rates

   The interest rates on an investment property will be higher than on a principal residence property. A mortgage professional should be able to help you get the lowest possible interest rates, but they will still most likely be higher than on a regular mortgage. Make sure you budget for higher interest rates when planning your investment.

5. The Fixer-Upper

   Real estate TV shows may have popularized the idea of the fixer-upper, that is, a property in bad condition that the buyer can snatch up for a cheap price, renovate, and flip for a huge profit. If this is your first rental property, it’s best play it safe and avoid a fixer-upper. Home improvements are often more costly and time-consuming than they initially seem. For those who are more experienced with real estate investments, and who have established relationships with contractors who will provide good, affordable work, the fixer-upper can really pay off. For the first-timer, it’s best to stick to a less challenging project and gain experience before diving into the deep end.

   If you are thinking of buying an investment property, contact a mortgage professional today for all the help and advice you need!