An investment property is real estate purchased to generate income through rental income or appreciation. Investment properties are typically purchased by a single investor or a pair or group of investors together.
First, know that the buying process is different for an investment property compared to a primary home. Before you invest in property, make sure you meet the following qualifications.
You’re Financially Stable
Investment properties require a much higher financial stability level than primary homes, especially if you plan to rent the home to tenants. Most mortgage lenders require borrowers to have at least a 15% down payment for investment properties, which is usually not required when you buy your first home. In addition to a higher down payment, investment property owners who move tenants in must also have their homes cleared by inspectors in many states.
Make sure you have enough money in your budget to cover the initial home purchase costs as well as ongoing maintenance and repairs. As a landlord or rental property owner, you must complete essential repairs in a timely manner, which can mean expensive emergency plumbing and HVAC repairs. Some states allow tenants to withhold their rent payments if you don’t fix broken home utilities on time. Make sure you budget more money than you think you need for regular and emergency home repairs. Investment property expenses don’t just begin when tenants move in. You also need to budget money for advertising and credit checks to make sure you take in the best tenants possible. A great set of tenants are an asset for your property, while bad tenants can increase your expenses dramatically.
The Return On Investment (ROI) Is There
Real estate investors often see positive cash flow with their investment properties in today’s market, but the savviest investors calculate their approximate return on investment rates before they purchase a property. If you buy a property in a solid area and you know that you can rent to reliable tenants, a 3% ROI is great. However, if the property is in an area known for short-term tenants, a 3% ROI may not be worth your time and effort.
You Have Time To Manage It
Investment property management still takes a lot of time. You have to put up advertisements for your space, interview potential tenants, run background checks on tenants, make sure that tenants pay their rent on time, perform maintenance on your property and make timely repairs if something in the home breaks down. You also must do all of this while working around your tenant’s “right to privacy,” a legal standard that prevents you from dropping by unannounced without at least 24 hours of warning in most states.
Before you decide to buy an investment property, make sure you have plenty of time to maintain and monitor your space.