4 Things to Know Before Buying Your First Investment Property
Buying rental properties is one of the most popular ways investors boost their portfolios and generate greater wealth. Those buying their first investment property are typically looking for ways to make money passively. Many will hire a property manager to handle marketing the property, rental arrangements, maintenance, and other tasks.
Passive income from one's first rental property can be a sound financial safety net for generations. Any cash flow rentals generate can often be used to pay down the principal on the mortgage. Furthermore, rental properties can be sold when investors find an optimal time in the market for a big profit or mortgaged again for liquidity for additional property investments. Read on to learn four tips for buying your first investment property.
Look For Desirable Real Estate
A few key things determine whether a property is a good investment. First-timers might want to explore homes requiring low maintenance and a solid history with limited vacancies to ensure an excellent rent-to-value ratio.
One of the biggest mistakes new investors tend to make is buying a fixer-upper, which can set up a money pit situation that turns out to be a major cash cow. However, investors with handyman skills or who know a reputable repair provider may find the light at the end of the tunnel. That being said, experienced investors recommend starting with a rental property in workable condition.
Investors will also want to research the area where they are buying to find red-flagged locations with excess vacancies. Try to find places in communities with low vacancy rates that are more likely to lead to regular long-term leases.
Another tip is to follow the 1% rule when investing by considering current rental rates that align with monthly rents equating to 1% of the initial investment in the property.
Double Check Expenses vs. Anticipated Cash Flow
Investors will need to factor in several valuations, including the home's purchase price versus potential rental income, to determine if there is a solid chance of seeing a reliable return on investment (ROI). Expenses include:
- Mortgage payments
- Property taxes
- Property management payments
- Insurance costs
- Repairs & upkeep
ROI can be calculated by exploring the property's net annual income after paying for routine expenses and possible vacancy periods. HOA fees will also need to be factored into rental prices or added as an additional expenditure. Before leaping into real estate investments, take a hard look at those personal finances.
Plan Goals & How to Accomplish Them
Determine early whether the plan is to self-manage or hire a property management company and what price range is feasible, what rental prices are reasonable, and how much income the property may provide. Investors will want to explore whether they are interested in single-family housing, multi-family properties, or a traditional commercial rental property.
Setting a good idea of the overall goals and how they can be achieved can prevent investing in a money-losing property. First-time investors should give a hard look at hiring a property manager to assist, as there is a lot involved in being a landlord, especially for those who don't live near the property or lack DIY repair skills. Prepare to spend 10 to 25 percent on property management services, with the higher end attributed to vacation properties versus long-term tenants.
Tap Into Local Resources
As a first-time property investor, doing due diligence is a given. However, reaching out to some local resources such as real estate professionals, investment brokers, and even contractors lets buyers decide when, where, and what time of property to buy. Trends in the local real estate market continually fluctuate, so these relationships are excellent for obtaining better insider knowledge of the current scene.
There are a few other aspects to evaluate before buying, such as:
- Population influxes
- Employment opportunities
- Percentage of renter-occupied properties
- Vacancy rates
- Median rent trends
- Average housing prices
These details can typically be obtained from local and state resources. This knowledge will be essential in deciding whether an investment is a good one or one to pass on.
Invest in Rental Property With the Right Information
The chances of seeing solid returns and having a streamlined owner/landlord and tenant experience are elevated when using these four first-time real estate investing tips. Doing research and making plans before the purchase is a great way to start the investing process.