Buying an investment property is a great way to dip your toe in the real estate investment waters. Before you get started, you’ll need to evaluate your finances, your business model, and your plans for managing the property. Bay to Bay Brokerage can be a wealth of information when it comes to picking the property that will provide the best return on your investment.
Your Financial Picture
According to Chase, you’ll need to have a solid credit score and a good debt-to-income ratio to purchase an investment property. You’ll also need a downpayment, and you’ll have to demonstrate to a lender that you have the means to pay the mortgage, even if the property sits vacant. Get all of these details lined up before you start looking at properties. Being pre-approved for a loan will help ensure you can act quickly when the right space becomes available.
Evaluate The Market
Look into the health of local rental markets before you select a city in which to invest in a property. According to Stessa, ideally, you’ll want a location in which vacancy rates are low and rental rates are healthy enough to cover your mortgage, as well as provide you with profit. Different cities have different rental needs. For example, in a college town, you might look for multi-family housing like apartments or condos; in a resort destination, close proximity to attractions and a vacation-style single-family home might be the best bet.
There are certain features that make a rental attractive to tenants. For example, having appliances in the rental, like washer/dryer and refrigerator are key; in a temperate climate, a pool and outdoor living spaces are popular, and if you’re looking at a colder climate, a fireplace may fit the bill. Ample parking, multiple beds and baths, hardware floors, central air and heating, and updated decor are often favored. If you’re looking at a vacation rental, a fully-furnished property will be an asset.
Searching For Deals
A knowledgeable real estate agent can help you make a determination about which properties in a given city are best for the rental market. You’ll also want to consider things like access to transportation, proximity to good schools, and distance from common services. An agent can also help you understand the types of features renters in your price range are looking for. An estate sale property might be a good option for getting a deal, though it may have to go through probate, and it might be sold as-is, in which case you’ll want to have an inspection and hire an attorney to do a title search to look for red flags.
Old Or New?
While a new house is going to need fewer repairs, an older home is likely to be less expensive. Take into consideration how much of a fixer-upper you want to handle. This can also be the basis for your decision to self-manage the property or hire a property manager to handle the details for you. Part of owning an investment property includes advertising for tenants, screening them, writing contracts, collecting rent, and troubleshooting problems and repair needs.
Running Your Business
As an investment property owner, you’re running a small business and will need to conduct operations accordingly. Consider forming a limited liability company, or LLC. This will protect you from some types of liability, give you flexibility, and make it easier to file taxes. You can hire an attorney to do the work for you, file the papers yourself, or your best bet, use a formation company like ZenBusiness to handle the details. LLC formation laws vary from state to state, so learn yours in advance.
An investment property is a great way to get into the real estate rental business, but it does involve a degree of risk. Do your due diligence to ensure you’re getting a good property in the right market for the right price.
Featured Article by Jackie Waters