Buying an investment property can be a profitable short-term and long-term investment if you do things right from the onset. Preparation is a huge part of your success equation when acquiring an investment property. That’s because the final outcome of your investment does not always depend on the building itself.
Several factors come together to create your results. Below Upkeep Media team explains the things to think about when buying an investment property. Each step in the list improves your chances of being able to find the right property, get financing for it, and eventually make a profit from the purchase.
What to know before buying your first investment property
1. Assess your financial situation
Do you have enough financial capacity to buy another property? Can you cover your existing financial obligations with ease after the purchase? These are some questions lenders will want to find answers to. You will be better off answering it for yourself before approaching a bank.
2. Do you have good credit?
Even if you are in great financial shape, your financial past will count for or against you when you apply for a loan. Your credit score/history is a lender’s way of assessing your financial competence and trustworthiness. You need a credit score of 700+ and there should be no delinquencies in your credit history.
3. Prepare to show proof of income
You should have income that is sizable and steady. If you are in paid employment, the lender will want to see a job letter from your employer (30 days old, at most) and pay stubs going back several months. If you are self-employed or earn commissions, registration documents for your business, a financial statement, and Notice of Assessment for two years will be required.
4. You should not have a lot of debt
The amount of debt you have affects your ability to pay the mortgage on the investment property and your primary home. For this reason, lenders will want to see how much money you earn monthly and what percentage of that income goes into debt repayment. Ideally, you should not spend more than 35% of your monthly income on debts.
5. Know the different financing options
In addition to conventional mortgages, there are other ways to finance an investment property. If you have built up a substantial equity in your primary home, you may want to consider using that equity to finance the investment. There is also the option of using a private lender. Hard money also exists as an option but it is not recommended for first-time landlords.
6. You need money for the down payment
Expect lenders to ask you to make a 20% down payment on any property you want to buy. Before the lender goes forward with your loan application, they want to see this money in your bank account. The funds must not be borrowed but it can be a gift or inherited. Additionally, you need 3%-6% of the sales price of the home to pay for the closing costs.
7. Consider becoming an owner-occupant
Lenders will offer better loan terms if they know you will live in one of the units in the property. Owner-occupied homes are a less risky investment from a lender’s point of view. You can take advantage of this to get a lower down payment (5%-10%). Moreover, you will usually be able to rent out of the unit after one year of living in it.
8. What is your preferred location?
Various things about the location of a property combine to determine its overall appeal and profit-making potential. Factors like crime rates and the number/quality of amenities make a lot of difference. Is the property close to places of employment and entertainment? Is there access to different modes of transportation?
9. What kind of property should you buy?
An investment property may be for residential or commercial use. The opportunities and challenges of each property type vary. Also, there are several types of commercial and residential properties. As a first-time buyer, the safest option is to buy a low-cost home; following this route will give you the chance to learn without exposing you to a lot of risks.
10. What is your investment strategy?
There are different strategies to choose from when investing in properties: short-term, medium-term, and long-term strategies. For the first-time property investor, a short-term strategy like fixing and flipping is not recommended. For your first investment property, buy with the intention of holding the asset for a long time.
11. Determine the cost of owning the property
Calculating the cost of owning the property versus its projected revenue is critical. As a rule, a good investment property should generate a minimum of 1% of its purchase price as the gross monthly rent. On the other hand, the cost of operating the property should not exceed 50% of the gross annual income from the asset.
12. You need a team
Finally, your property management team determines the extent of your success. Key members of the team include a lawyer who understands local laws/regulations for rental properties, an accountant to sort out tax issues, and a professional handyman to deal with maintenance and repairs.
Things You Need to Know Before Buying Your First Investment Property by Alexander Hassoulas | Upkeep Media