Considerations for Buying an Investment Property

Posted by Monty Crawford on Friday, December 7th, 2018 at 8:35pm.

Buying an Investment PropertyThe housing market today is considered to be a seller's market. There is currently a low inventory of homes and many buyers looking to purchase a home. This can make finding an investment property difficult but certainly not impossible, and arming yourself with knowledge about purchasing and managing an investment property can make real estate the solid investment that you were looking for. 

The very first consideration to think about when purchasing an investment property is to look at your situation and determine if you have the necessary skills and resources to improve or maintain the property once you have bought it. Questions you may wish to ask yourself are “how many hours a week do I have time to do minor repairs such as unclogging toilets or replacing switches or fixtures?” “Do I know how to repair drywall?” “Do I have time to replace flooring?” Of course, none of these things are really an issue if you have lots of spare cash to pay a repairman or contractors. It truly is best to be at least moderately handy with minor repairs, and also possess the tools to do them.

Time is as important as money when planning to become a landlord. If you have children, work 40 hours a week, and commute 10 hours a week there is likely not enough time in the day to manage an investment property. If time is an issue, but you still wish to have the additional income from a rental property, you may consider contracting with a property management company. This will cut into your profit margin on your investment property and you should investigate what those costs are in your area to determine if hiring property management is worth it for you.

Looking at your current debt is another step to take during the preparation for investing in real estate. If you have student loans, college students, or medical bills, buying an investment property may not be the thing to do until those financial challenges have resolved. Since investment properties require a larger down payment than buying an owner-occupied property, knowing whether you are able to come up with a 20% down payment is an important financial consideration. 

The interest rates for borrowing money on an investment property are usually a bit higher than traditional mortgage interest rates. Be sure that you are getting a rate that allows you a low enough mortgage payment to be able to profit on your rental property.

When determining what monthly payment you can afford on a rental property, calculate your operating expenses. The easiest calculation is to use the 50% rule. If you charge $1500 in rent you can expect to pay $750 in total expenses to maintain the property with repairs, mortgage insurance and property taxes.

If you are new to owning a rental property, it is a good idea to start small such as purchasing a condo, duplex, or single apartment. This requires a smaller investment of money and time and will allow you to become an experienced landlord with a smaller amount of risk. 

Fixer uppers are very tempting due to the fact most of them are selling below market value. Unless you are skilled in renovation and large-scale home improvements, the cost of bringing the house back to marketable condition is likely too high. it is better to look for homes that are selling at below-market rates that will only require modest upgrade and repair. 

if you are looking at buying an investment property with partners, be sure to get a written agreement you are comfortable with that covers the purchase and maintenance of the property, and you should consider allowing a real estate attorney to look it over for you to prevent unforeseen conflicts.

If after considering the overall investment of time and money required for buying and owning an investment property, you discover that perhaps you are not yet ready but are still interested investing in real estate, you may wish to consider a Real Estate Investment Trust. These are privately or publicly held companies that use investor money for the purchase and leasing of real estate. You would need to open a brokerage account which offers many of the same benefits of owning real estate, such as producing routine income with quarterly dividends.

If you are buying or selling a home, and want a competent realtor, contact the experts at Crawford Realty Group to learn more or arrange a showing. If you'd like to have homes for sale in these areas emailed to you, sign up for our free home finder service and specify which types of homes you'd like to receive updates about.

Taking time to assess your situation, the market, and what your real estate goals are will help you determine what type of investment property to purchase, when will be the right time for you to purchase it and whether you are wanting to become a landlord or if you wish to purchase a property, improve it and then sell it at a profit. There are many ways to invest in real estate, and speaking with an experienced realtor is the best first step in creating your best real estate investment plan.

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