Are you considering buying an investment property? Many of the world's wealthiest people have come from real estate, so there are lots of reasons to believe it is a good investment.
Experts agree, however, that before investing hundreds of thousands of dollars, it's best to be well-versed in the field. Here are some things to think about and look into.
1. Eliminate Personal Debt
Debt may be part of a savvy investor's portfolio investing strategy, but the average person should avoid it. Purchasing a rental property may not be the best option if you have student loans, overdue medical costs, or children who will be attending college shortly.
2. Put down a deposit
Investment properties typically require a greater downpayment and have more severe approval criteria than owner-occupied properties. The 3% down payment you made on your present home will not work for an investment property.
Because mortgage insurance is not available on rental properties, you'll need at least a 20% downpayment. A down payment may be possible through bank finance, such as a personal loan.
3. Locate the Ideal Location
The last thing you want is to be trapped with a rental property in a deteriorating neighbourhood rather than one that is steady or growing. A city or location with a booming population and a revitalization plan in the works could be a good place to invest.
Look for a location with low property taxes, a good school district, and plenty of facilities, such as parks, malls, restaurants, and movie theatres, while looking for a profitable rental property. Furthermore, a low-crime neighbourhood with public transit and an expanding job sector may attract a wider pool of possible renters.
4. Should You Buy or Take Out a Loan?
Is it better to pay cash for your investment property or to take out a loan? That is dependent on your investment objectives. Paying cash can help you have a positive cash flow month after month. Take, for example, a $100,000 rental property.
With rental revenue, taxes, depreciation, and income tax, the cash buyer may earn $9,500 per year on a $100,000 investment, or a 9.5 percent annual return.
5. Be wary of interest rates that are too high
Although the cost of borrowing money may be low in 2020, the interest rate on an investment property is typically greater than that of a standard mortgage. If you do opt to finance your purchase, you'll need a moderate mortgage payment that won't take up too much of your monthly earnings.
6. Determine Your Margin
Because, among other things, they must pay workers, Wall Street businesses that buy distressed homes aim for returns of 5% to 7%. Individuals should aim for a 10% return on investment. Annual maintenance costs should be estimated at 1% of the property value.
Homeowners' insurance, prospective homeowners' association fees, property taxes, monthly expenses like pest control and gardening, as well as regular maintenance bills for repairs, are all factors to consider.
7. Purchase Landlord Insurance
Protect your new purchase: Consider obtaining landlord insurance in addition to homeowners insurance. This sort of insurance typically covers property damage, loss rental income, and liability protection in the event that a tenant or visitor is injured due to poor property management.