How to Buy Investment Property? You buy a home, put out a ‘for rent’ sign in front of the yard, a nice family then moves in, and you then start collecting monthly checks, sounds so easy right? If only investing in real estate was that simple!
It is not rocket science, which is the good news. Understanding the basics and a fair amount of due diligence can make you very successful in investing in rental properties. You need to know how to buy an investment property and determine if it’s right for you, which is the first step.
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Secure your Financing
You will need to line up financing for your rental property acquisition unless you have a lot of money sitting somewhere.
You will need to get pre-approved for a mortgage loan before you can start identifying properties you intend to buy. A bank or lender will look at your current income, credit score, and other factors that are not a reasonable risk which is similar to getting a mortgage on a primary residence.
The lowest-risk borrowers attract the best loan terms and interest rates. That means, maintaining a good credit score and keeping your debt-to-income ratio below the bank’s requirements. To monitor your credit score and your overall finance, you can use personal finance platforms.
When buying your own home, less money is needed to be put down unlike when you put down money on an investment property loan. A larger down payment is required from Non-owner-occupied homes because they are a more significant lending risk. At least 20% down is typically required by banks. To qualify for a loan, lenders will not consider anticipated rental income.
Ample cash is also required to be set aside. At least three months’ worth of anticipated rental income for things like maintenance, possible vacancies, and ownership expenses will be needed. It’s a good idea and that should help your chances of securing a loan to pay down a personal debt before taking on the responsibility of renting and owning properties. Services like Hometap are available if you need some extra cash which invests in the equity of your home. Hometap gets some of the proceeds and you get the cash when you decide to sell your home, or if before the 10-year term is up you decide to settle the investment.
You can use Monevo to compare loans and find one that is right for you if you rather get a loan to use for repairs and other unexpected expenses.
A mortgage is used by most investors to finance rental property purchases, there are other options to consider. With the money in your IRA, you might even consider buying rentals.
Choose What You Want to Buy and Where
Where to invest is one of the most important decisions to make. There are some great rental markets and some not-so-good locations across the United Kingdom where it is impossible to purchase a rental property that will provide positive cash flow. To find the best places to invest in real estate, it is important to research homes and rental prices.
It is beneficial to work with an investor-friendly local real estate agent because real estate markets are extremely local. Working with an investor-friendly local real estate agent with access to real-time and historical data to help you find and acquire good rental properties. Using a free service like Homelight, you can find one, which will match you with the top three agents in your area.
The pros and cons of rental property types should be considered when choosing a location. You might decide to choose a townhome, condo, duplex, or single-family home. A condo might be a good starting point if you’re not the handy type because the roof and exterior are not your responsibility to maintain. Much maintenance is required in a townhome or duplex than a condo but not as much as a single-family home.
Choose your Strategy
Buying a property that is rented, that gives you monthly income is a strategy called Rental property investment. The rental income must exceed all costs of doing and maintaining it for a property to have a positive cash flow. There are a couple of ways that you can go about investing in a rental property.
- Invest in Crowdfunding
This is a great strategy for beginners using the crowdfunding strategy and it is more passive than owning an actual property.
Real estate crowdfunding means pooling out your resources with other groups of investors to make a more significant investment in a property or group of rental properties. The implication of this is that the minimum investment is easier on the wallet. Investments of as low as $500 are offered by some crowdfunding platforms.
- House Hack” Your First Rental Property
A great way to start investing as a beginner is to “house hack”. This is a slang term for buying a rental property that you will live in at the same time you rent out part of it.
With a duplex, it is easier to “house hack” because you get to live on one side and rent out the other side to tenants. Or you buy a three or four-bedroom single-family home and live in one room and rent out the extra bedrooms to friends or peers, that is if you are still single.
- Invest in a Turnkey Rental Property
Buying a Turnkey Rental property offers a higher level of passivity than purchasing and managing rentals yourself. There are companies in the business of acquiring properties, turning them into ready-for-market rentals, and then selling them to investors.
Research and Analyze
It is very important to do a proper due retrospection on all aspects of every deal. You need to make sure to get it right because there are a lot of so-called ‘deals’ touted. How much will the rehab cost? What permits do you need and how long will it take to get them? What is the monthly holding cost? It is an extensive list you need to be answered.
It is a huge investment when it comes to property, and so due diligence is highly required. Checking it out personally before buying is simply a must-do every time.
Always get an Inspection
It is very important to go inspect a home you intend to buy. Never buy a home unseen. Even if you know the neighborhood and can view hundreds of photos online, even if the price is crazily low and you might miss out if you don’t get on the deal, never make an offer on any property unless you’ve inside personally.
Make Sure You’re Insured
A landlord insurance is also called a homeowner insurance and is also known as a “dwelling fire policy” or “fire and special perils policy”. If there is break-in or if it burns down, homeowner insurance covers that. And it pays medical and legal bills if someone gets hurt on your property. There is a higher risk of loss to you and your insurer when you rent out a home.
Other structures on the property such as a garage or shed are covered by this insurance. The owner’s (not the tenant’s) possessions, lost rental income if the house is uninhabitable, and some liability protection for the owner in case of an injury or lawsuit. Read the fine print and all the fine print and all the exclusions.
Submit Your Best Offer
In writing, make an informed offer using state approved contracts, and back it up with proof of funds that you’re able and willing to close if your offer is accepted quickly. You will typically need a copy of the bank statement along with your offer from which your down payment will come, a pre-approval letter from your lender if you’re financing the purchase, and an earnest money deposit check.
Weigh the Risks and Rewards
It is a long term investment when you own a rental property. Real property is an illiquid asset that you can’t sell quickly if you need cash and so transaction cost can be high. It is very important to do your due diligence and also weigh the risks and rewards of rental property investment.
Accurately Calculate the Expenses of Owning a Rental Property.
The following are the main monthly operating expenses and they are easy to calculate and budget:
- Property taxes
- Landlord insurance
- Property maintenance
- Mortgage payments
Unexpected cost should be a factor as well. You will have to do regular maintenance costs, which could include replacing HVAC filters. And you may likely have repair costs that will vary year to year based on when appliances break or wear out and need replacement.
Learn to Calculate Cash Flow and ROI
- ROI: By dividing the annual income by your total investment, you can get the ROI. If your rental income is $15,000, and you paid $150,000 for the property, your ROI is 10%
- Cash Flow: this refers to how much you are making from your investment each month. If the rent you collect is $1500 and your expenses total for a month is $1200, your property cash flow is $300 per month.
Know Your Legal Obligations
A legal contract that binds both the landlord and the tenant is known as a lease. Local and state laws differ, but in general, landlord-tenant law addresses relationship in five aspects:
- The amount a security deposit a landlord can charge and how it is held.
- Information the landlord must tell his tenants which could include disclosing the possibility of lead paint
- The unit rules of possession.
- Landlord liability
- Responsibility for maintenance.