Get informed and make smart choices
Ongoing income and a secure future – that’s part of what makes an investment property such a great idea. But it’s also a huge commitment in terms of finances. And it’s anything but quick and easy.
However, for those who are willing to do their research and put in the time, investment properties are a good long-term approach to supplementing your income or working for retirement.
Before you jump into the investment property arena, the following is a list of some of the things you need to consider.
6 things to think about before you buy an investment property
What’s your overall goal?
Once you figure out what you want to achieve financially, you can decide whether buying a rental property is the way to do that. Make a list of what you have going in, what you’re hoping to get out of it and what it will take to make those two things mesh. Investing in property is a long-term commitment that requires money at the outset and money all the way along. The results can be very good, but it’s not a get-rich-quick scenario by any means.
How will you finance and what’s your down payment?
Typically, properties are financed through mortgage loans, so speaking with a mortgage broker is also a good early step. They’ll let you know what you are working with and how much of a down payment is necessary. And when it comes to down payments, greater is better. Not only will it be easier to finance, but often sellers are more likely to go with a buyer who has a good chunk of cash ready to go. Can’t save for a good down payment? Maybe an investment property isn’t for you right now.
What kind of property are you considering?
There are so many options: condos, townhouses, single-family homes, duplexes, vacation properties, etc. Depending on your budget and target tenants, you’ll have plenty to think about. Generally, a smaller, lower cost option, such as a condo, is best for those just getting into the market.
What area will you buy in?
Location, location, location, right? Where you buy is a big factor in return on investment. Just because a house is a great deal doesn’t mean it will pan out – maybe those sellers are listing for a reason! A market analysis is a good idea. Is there high or low vacancy in the region? That will tell you what you can expect to get for your place. Is there a college or university nearby? You might have to deal with occupancy issues and frequent changeover. What are the growth indicators like in a specific area – is the population growing and the economy stable? Are there job opportunities? All these variables will influence both your short-term tenant decisions and long-term re-sale options.
Have you done a property assessment?
If you’ve narrowed down your options, then you’ll want to analyze and assess the property before making any commitment. In addition to looking at purchase price, you’ll need to evaluate any property management fees; municipal property taxes; insurances; mortgage and financing payments; repairs and maintenance. At that point, you can compare the monthly expenses to the rental income and have a better idea if the property will generate positive cash flow.
Do you have an exit strategy?
Hopefully, things will go super smoothly from this point forward, but what if things go wrong or you’re in quick need of cash? What’s the plan then? Best-case scenario, you get out of the situation while still making a profit. Selling and refinancing are both options, but it’s good to have a plan going in. Talk with your real estate agent and mortgage broker to discuss what may work best for you down the line.
Obviously, numerous factors come into play and must be considered before investing in real estate, so it’s prudent to ask lots of questions and do plenty of research. Investment properties can be very rewarding, but they do require adequate planning.
Talk to your real estate professional to see what opportunities are available to you!