So, you’ve decided to test the real estate investment waters—very exciting! Purchasing an income property is one of the most secure investments you can make with your money. Why? Because it is a physical asset that appreciates over time. Not only that, but if you purchase and plan properly, making sure the investment cash flows every month, this is an amazing source of passive income. Here are 5 insider tips on planning your investment well:
Before diving into the property search, you must first arrange your finance options. How are you going to purchase this income property? Cash or conventional financing? Not many people know that investors are now able to invest directly in real property, mortgages, private placements, and other non-traditional assets through self-directed Individual Retirement Accounts (IRAs). For rental properties, an investor could open an IRA custodial account, and transfer from his/her 401(k) and purchase the rental under the IRA.
If you are going the conventional route, you need to get pre-qualified. You will need to have sufficient funds for a down payment, ranging from 5-25% depending on your credit history, and it makes the process easier when you have good credit. Meet with a local mortgage broker to assist you with the pre-approval process. Your income, outstanding debt, credit rating, and down payment will all be taken into account when going through this procedure. Getting pre-approved often makes your offer a lot stronger to sellers!
Just like the search for your own personal residence, you want to make sure your rental is in an appealing location, where tenants want to live! Look for properties in safe neighborhoods, close (but not too close) to town, and avoid those on main roads. If the property is not in your hometown, don’t be afraid to utilize a local agent’s market knowledge and ask their opinion of the property and whether or not they think the property you’re interested in would yield good occupancy!
The bottom line is that an investment property is all about the income. You need to determine the investment potential by estimating costs versus revenue. Property taxes, maintenance, utility, and finance/mortgage costs are what you will be paying as the owner, and the rent is what you will be collecting from the tenant to help pay those costs. Before you decide to purchase the property, estimate costs and research rent rates in the area, and make sure that income > expenses. Tenant rent goes toward paying back the mortgage every month, and once the home is paid off, the rent turns into passive income, with very little extra costs to cover!
The purchase price is VERY important! If you don’t buy right, your monthly cashflow can be nonexistent! After determining your desired cashflow, you need to be able to purchase the property at a price that will enable that to occur. If you can’t acquire the property for that buy price, you need to be able to walk away!
When marketing your property as a rental, make sure you screen your tenants. You want tenants that will respect your property and keep it in good condition, treating it as if it were their own home. If you set expectations up front, you will run into less problems down the road.