Investment properties can be an excellent passive income source. Before you make the commitment to being a landlord though, evaluate your reasons for buying an investment property. Is it for extra income? Retirement planning? Or are you looking at this becoming your primary occupation? Knowing your personal reasons will help guide you towards making the best choice for you financially when it comes to investing.
There is a delicate balance in finding a neighborhood with properties that are a good value and neighborhoods where renters would like to live. It is also good business practice to own your rental properties in proximity to where you live. This will make maintenance much easier and allow you to promptly resolve issues as they arise.
The Price Must Be Right.
It almost goes without saying that the right price is critical when choosing an investment property. Even though popular television shows make flipping properties seem like an easy and lucrative practice, it is actually a high-risk proposition. Plan on holding onto your property for at least five to ten years in order to receive a positive return on your investment.
You will want to have cash on hand of at least 20% for the down payment, up to 30% if the property you are buying is not owner occupied. Be sure to work with a knowledgeable Realtor like my team at Mark M to help guide you through what properties will really be a value as well as an investment in your area.
Don’t Forget the Utilities.
Make sure that you calculate the cost of ownership into your investment. Include the mortgage, taxes, and insurance, renovation and maintenance costs and be sure that there is enough in reserve to cover vacancies between tenants.
Utilities in particular can become a major issue if they are not set up properly. It is good practice, and protects you, to have tenants set up utilities in their own name.
Rules and Regulations.
Before you sign any paperwork on an investment property, take the time to educate yourself regarding local regulations. When evaluating potential investments look closely at factors like the amount of parking, safety factors,quality construction and local rental rules like occupancy rates.
Be aware that there could be regulations in your area regarding the number of parking spaces that are available that differ from residential requirements. It will be also important for you to work with an experienced and reputable home inspector who will be able to evaluate your property for any safety issues that violate local building codes and potential problems (like fire and electrical hazards) that could result in lawsuits. If you are looking at a fixer-upper and planning renovations understanding local code and rules becomes even more important.
Start as an Owner-Occupant.
One option for breaking into investment properties is to purchase a resident that you initially live in with plans of renting it out in the future. With HUD or VA approved properties this can be a financially viable option since if you live in a house for at least a year, you can start by making a smaller down payment.