Buying an investment property has long been one of the most popular ways to invest in real estate, and it’s not difficult to see why. Although it requires a certain amount of upfront capital and ongoing work, an investment property can yield a substantial return not only through regular passive income (rent payments), but potential tax deductions and equity gains as well.
However, as is the case with any other form of investing, if you want to maximize your returns and limit your risk as much as possible, it’s vital to do your due diligence beforehand. Read on for a look at some of the most important things you need to do before diving into an investment property purchase.
Leave emotion out of it.
If you’re buying a home for yourself and your family, then of course you should listen to your heart as well as your head. But emotion is best left at the door when it comes to buying an investment property. Don’t focus on your personal likes and dislikes about particular properties; instead, leave your feelings out of the process and reframe it as purely a business decision. This will help you think things through logically and make informed and impartial choices, which will in turn improve your chances of getting a good return.
Know what you’re looking for.
Before you even start shopping around for properties, you need to know what you want to buy and where. This means you’ll need to do some homework. Specific things to research include demand levels for different property types—for example, in a market that has plenty of one-bedroom but few two-bedroom rentals, it likely makes more sense to invest in a two-bedroom. You should also research locations, since experts agree that property location, even more so than the property itself, is what will help you attract the kind of tenants you’re looking for.
Get an inspection.
Do not skip this step! Getting a home inspection prior to making an offer on an investment property is one of the most important things you can do to protect your investment. Don’t go by appearances alone: a professional inspection can reveal key issues, such as problems with plumbing or electrical wiring, that you wouldn’t be able to detect from a casual viewing, and that could end up being very expensive to correct.
Understand the expenses.
One of the biggest mistakes people make when buying their first investment property is underestimating the ongoing expenses. Taking the time to crunch the numbers properly before making a purchase will help you decide whether a particular property is worth your investment. In addition to mortgage payments, you’ll need to budget for things like property taxes, homeowners’ association or condo fees, landlord and/or property insurance, and property maintenance costs. You’ll also want to make sure you’re setting a regular sum aside to deal with unexpected costs and repairs. Finally, if you’re not intending to be a hands-on landlord, you’ll need to pay for professional management services.
Make sure you can afford the down payment.
Did you know that you typically need to pay a much larger down payment on an investment property than you do on a property you’re intending to live in? This is to compensate for the fact that mortgage insurance isn’t available for rental property purchases, as well as for the stricter approval criteria that are required for securing investment property financing. In most cases, you’ll need a down payment of at least 15-20% for an investment property, so before you start shopping around, make sure you’ll be able to raise the necessary cash.
Know your legal obligations.
If you’re intending to manage your investment property yourself and be an active landlord, it’s essential to know your legal obligations. Not fulfilling them could have financial consequences. Depending on your location, laws dealing with the tenant-landlord relationship may vary somewhat, but they will typically address security deposit amounts, information that the landlord must communicate to the tenant, the rental property’s rules of possession, maintenance responsibilities, and landlord liability. You should also get up to speed on any applicable rent control laws. You may find it helpful to consult with a real estate lawyer to ensure you understand all the relevant details.
Even if you have plenty of capital available, many experts advise you to start small when it comes to buying your first investment property. If you start off with a property in the lower- to mid-range price bracket, you’ll be able to minimize your initial risk while learning the ropes of property investment and getting to know your local real estate market. This can be especially important during uncertain times when it’s difficult to accurately predict the demand for your property, or how much rent you might be able to charge for it.