Planning to buy an investment property is an exciting … and serious venture. For most, no matter how logical and analytical the investment property search begins, the further you get into the process, the more “emotional” the decisions become. While buying an investment property certainly makes sense for some, be sure to consider the following before making the big decision:
Research, Research, Research
Finding the perfect physical property is just the tip of the iceberg. Research on everything from the demographics, schools, and new projects around you are just as important for the future value of the property. In a fast growing place like Middle Tennessee, researching the future of the surrounding area is crucial for any investment. Consider these questions as you start your research:
What is the availability of new land in the area?
What major projects are happening in the area?
What major retailers are moving to or from the area?
What transport plans are in the area?
What is the percentage of renters in the area?
What is the vacancy rate in the area?
What is the time it takes to get to major city centers?
Depending on how long the previous owners owned the property, the previous owners could have been locked into a certain tax rate. Be sure to find out what it would be when the property switches to new hands to avoid the shock of higher taxes than you were expecting! (Warning: There are often different property tax rates for investment owners versus homeowners).
Repairs & Landlord Duties
If you’ll be serving as the landlord, be sure you have both adequate time and money to make the necessary repairs that pop up. Repairs can be expensive and can happen at any time – so it’s necessary to have the funds (and time!) for those unfortunate issues that can pop up.
Just like repairs, insurance costs are inevitable and need to be factored into your total cost. Depending on the type of coverage and risk factors for your area, insurance premiums can greatly vary. Don’t forget to include the insurance in your overall total.
Prepare for the Full Down Payment
Unlike a house where you can get by with paying 3% down, mortgage insurance isn’t available for investment properties and you will need to have saved for at least a 20% down payment.
Sometimes a rental goes unrented or a quick house flip turns into a much bigger project than once assumed. Be prepared for there to be a lag before you start generating income on the property!
Depending on the type of investment property and strategy, you may have to sell your property at a certain point to make your return on investment. It’s always good to think about what the exit looks like from the very beginning. Is this property likely to have a difficult time reselling? If the answer is yes, that may be a dealbreaker.
One of the best ways to see if buying an investment property is for you is to start as small as you can. While it may equal less income than you were originally hoping for, you get to experience everything that comes with owning an investment property on a smaller, more manageable scale before taking an even bigger leap of faith.
Investment Partner = Business Partner
It may seem obvious, but it is worth pointing out: going in on an investment property with someone is the same as going into business with someone. Just as you would with a business partner, be sure you are confident about not only your personal relationship, but the goals and expectations involved with the investment, as well.
The 1% Rule
Does it meet the one percent rule? Traditionally, a safe property investment means that you are making a 1% return on the overall amount you paid for the property. Unless you are absolutely sure that the area is rapidly changing for the better, you should be making 1% returns. For example, a $100,000 property should return at least $1,000 a month.