Purchasing an investment property? Real estate can be a great investment and there are some important things to keep in mind before jumping in.
1. Understand your spread
After monthly payments, taxes and fees, what do you hope to make on a monthly basis in rent? This is your “spread” and while you might be comfortable making less for the first year or two while you expect the home to increase in value in the future, you should be prepared for potential market fluctuations and have a realistic minimum spread in mind.
2. Choose your property type
Town homes, condos and single-family homes all have their pros and cons, so consider what is important to you and your potential tenants. For example, the HOA-covered exterior maintenance of town homes might be convenient for you and a selling point to tenants, but will likely require paying a monthly fee. Single-family homes tend to attract more families who often rent longer term, while properties near schools will tend to attract more students but might turn over each year.
3. Narrow down neighborhoods & research rental prices
With the plethora of real estate resources online (think Zillow, Trulia, Realtor.com and Rent.com), you can quickly look up rental listings and see what homes in your desired neighborhoods are leasing for. This will not only show you the going monthly rents, but also:
- Competition – what other homes are for rent and at what prices and terms? Located near schools? Leases starting in August with an option to rent for just 9 months might be more popular than a lease beginning mid-school year.
- Standard and bonus amenities – do stainless steel appliances and attached garages seem to be the norm? If so, take that into consideration when you start your hunt. What helps certain homes stand apart? If a fenced-in yard seems to be a huge selling point, make that part of your future search or calculate that into the cost of improvements for your potential investment property.
- Potential tenants – do certain neighborhoods seems to appeal to a target tenant market? For example, rental homes near medical districts might specifically mention the commute time to the local hospitals or neighborhoods that border the nearby college or university might advertise the walking time to campus, proximity to nightlife or the bus route.
Tip: It’s no secret that real estate is all about location but it’s also important to select an investment property that is convenient for you to easily check in on for maintenance and repairs. So while you might know of a great up-and-coming neighborhood two hours away, consider the time involved before committing to that property.
4. Get all your ducks in a row and wait for the right deal
Purchasing an investment property at the right price will help you to avoid potential financial pitfalls should you experience fluctuations in the market during the time you own the property. Having everything sorted out on your end will allow you to be in a position to buy when you do come across that great deal and need to act fast.
Here are some things to keep in mind:
- You’ll most likely need a large down payment, typically 20% as mortgage insurance won’t cover investment properties.
- Investment property loans will often be subject to higher interest rates
- A good rule of thumb for estimating maintenance fees is 1% of the property value
Ready to start your hunt? What areas do you have your eye on? We’d love to hear, share with us below.