8 Questions to Ask Before Buying Your First Investment Property
If you’re looking for ways to make passive income, an investment property may be a lucrative choice. Not only does real estate typically increase in value over time, but you can benefit by having renters pay your mortgage. Wondering if this may be your best course of action? Here are some questions to consider.
Do you want to be a landlord?
Before you take your first step toward buying an investment property, consider whether this is the right option for you. You’ll be responsible for your tenants’ welfare, as far as housing needs are concerned. For example, if the property needs emergency repairs, you’ll likely have to make sure they are completed promptly.
You should also know what you’re required to do by law if you’re a landlord. The U.S. Department of Housing and Urban Development lists tenant rights and protections by state. And if a tenant doesn’t pay their rent, you’ll still be responsible for the mortgage or it’s your credit that’s on the hook.
While there are many rewards to buying an investment property, there is plenty of responsibility too, so make sure you are ready for it.
Will your credit secure you the loan?
One of the biggest factors when making any major financial purchase is your credit. Lenders want to feel comfortable that a loan will be repaid before they lend you money. If you know that buying an investment property is something you want to do in the near future the time to start focusing on your credit is now.
Certain actions will improve your credit, such as paying your bills on time and keeping your debt load relatively low. If you’re uncertain whether your credit will be a help or a hindrance in your quest to buy an investment property, a Homeownership Advisor from HomeFree-USA can help you assess your creditworthiness and come up with a plan to improve your credit and increase your chances of being approved for a loan.
Do you have enough knowledge of the process?
The key to succeed in any endeavor is knowledge. If you want to buy an investment property, it literally pays to find out about the resources that are available to help you. Some of the things you’ll want to learn about include:
- How to start making money in real estate
- How to find affordable mortgage products for investors
- How to find programs that allow you to buy investment properties with little money down
- How to avoid costly mistakes
Nonprofit homeownership organizations such as HomeFree-USA can help you get the knowledge that you need. [MAYBE ADD A LINK TO THE EVENT HERE]
What type of property should you buy?
Once your credit is straight and you’ve done your homework, consider who your ideal renter is. Are you planning to rent to families? Then you may want to buy a single-family home. Are young professionals your target audience? Then you might want to buy a townhouse or condo. Your budget will also play a role in your decision, as different types of houses tend to have different price-points. For example, a single family home may cost more than a townhome of the same age in the same general location.
How do you determine the right location?
Just as your ideal tenant will play a role in the type of property you buy, it can help you decide on the best location to start your property search.
For example, if you intend to rent to college students, you may want a property near a local university or community college. Likewise, if you’re targeting people who value a social life, you might look to purchase a property near plenty of entertainment venues or restaurants. Young professionals may be willing to pay more to rent a house near public transportation so they can more easily get to work.
Should you look for a fixer-upper?
Houses that require a lot of repairs are likely to cost less than those that don’t. However, before you buy a fixer-upper, understand that you’ll have to come up with the money for repairs, particularly if you’re planning to rent the property out.
That may not be a problem, particularly if you have the knowledge and expertise to do some of the repairs yourself. However, make sure you take a good look at your budget to evaluate whether the money saved on the sale is more than the money you’ll end up spending on repairs.
Will you manage it yourself?
Another question you should consider before buying an investment property is how close you want to be to the day-to-day management of the property. Unlike a home, an investment property is a business.
Do you have time (or the desire) to manage the property yourself? Do you want to collect rent and deal with complaints or other issues that may come up? If you don’t, you can always hire a management company to manage the property on your behalf. Expect to spend about 10 percent of the monthly rent you receive to have this service performed for you.
Do you have money for other needs and repairs?
Even though you’re anticipating receiving rent payments, you’ll want to have some money saved up. What if the property needs repairs? Or what if your tenant loses their job and stops paying the rent? If a tenant decides to move, it may also take a few months to find a new tenant – once again, you’d be responsible for mortgage payments while you searched for someone to rent your property.
Buying an investment property can be a good way to create a stream of passive income, and it can help you to build wealth that can not only improve your life but the lives of generations to come. The best way to be a successful real estate investor is to get as much knowledge as you can. Then you can make that knowledge work for you.