Your first investment property is going to be the start of a rewarding and fulfilling experience. But make sure you understand what exactly you are getting yourself into. Make sure you take the time to approach your investment with care and consideration. Follow these steps, and you’ll be in an excellent starting place.
Secure a Down Payment
Investment properties typically require a heftier down payment than owner-occupied properties, in addition to having more difficult approval requirements. Typical home down payments are around 3% of the property’s value – for an investment property it could be higher than 20%. This is partly due to the fact that mortgage insurance isn’t an option for rentals. To help get the process started, you might need to get a personal loan or other financing option.
Decide Between Cash or Finance
Depending on the goals you have in mind for investment, you may have to choose between financing options or cash when purchasing. Paying in cash can produce a monthly cash flow of annual earnings, but if you put the 20% down, and finance the rest, you could see a larger return in investment, considering the lower entry cost.
Watch the Interest Rate
A good investor knows the importance of interest rates for investing. Investment properties will usually have higher rates than traditional mortgages, make sure to do your research on the rates in your area.
Invest in Insurance
In addition to homeowner’s insurance, consider purchasing landlord insurance – this will cover any potential property damage, lost rental income, and liability protection. These are the major issues investing risks, but such is life.
Know Your Operating Expenses
Operating expenses will typically be between a third and four-fifths of your gross operating income. As a general rule of thumb, aim for your monthly expenses to equal half of your earnings – and aim for low expenses in general.
In general, don’t get overly excited about investing. This is something that you need to think through very carefully in order to be successful, and making a mistake could be very pricy. Ultimately, the best advice you can take is this – work with someone who is experienced. There are many things to understand and keep in mind while investing, and having a knowledgeable guide through the process will help keep your head above water.