When you want to make your money work for you, investing in real estate is an obvious choice. Considered to be a safe investment, residential real estate pays investors back twice: first in rental income, and later when the property sells at an appreciated value. However, that doesn’t mean buying your first investment property is a decision you can make on a whim. There’s a lot that goes into a smart residential real estate investment, and one mistake could throw your money off course. These are three things to consider as you buy your first investment property.
Location, Location, Location
It’s true: When it comes to buying an investment property, nothing beats a great location. That’s because location is the biggest factor in your property’s appreciation and rental rate. That doesn’t mean you should choose a home in the hottest neighborhood, however. If an area is overpriced, you may struggle to recoup expenses via rent. Smart investors balance an area’s popularity with its affordability and rental demand. Just keep in mind, however, that the price of this investment will go up depending on the area you select, so make sure you find a place that’s both in tune with your budget and the demand for such a property.
Investment Property Financing Challenges
If you walk into your lender’s office expecting this property’s mortgage process to be as simple as your first one, you’re going to be disappointed. Lending requirements are significantly more stringent for investment properties than personal residences, especially for first-time investors without landlord experience.
In general, expect higher mortgage rates, credit score requirements, and down payments for an investment property mortgage. Lenders also want investors to have six months of mortgage payments in reserve. Some won’t lend to investors without a history of managing rental properties, while others will permit it with documentation of your property’s income potential.
There’s an alternative option for investors who can’t get financing. Instead of buying a single-family residence, purchase a multi-unit property using an FHA loan and live in one unit while renting out the others. As long as you live on-site, you can use these loans to purchase an investment property and avoid the property management history requirements.
Maintaining and Managing a Rental Property
Before going forward with your purchase, there’s one more decision you need to make. Do you want to be a landlord, or would you rather pay someone else to manage your property?
A lot of first-time investors skip professional property management in favor of larger profit margins, but this may be a foolhardy choice. Being a landlord means being at the beck and call of your tenants, especially if hosting short-term guests in a vacation rental.
If you have a career that prevents you from responding to tenant emergencies at all hours, hire a property manager instead. Property management companies often charge a percentage of rental income, but in exchange, you receive comprehensive services including marketing, leasing, housekeeping, and maintenance. In turn, the improved service can lead to lower vacancy rates and higher rental income for your property. Even with a property manager, it’s a good idea to install a home security system to give both you and renters peace of mind. The cost of installation averages $675, depending on its sophistication and the size of your home.
Don’t rush into an investment property purchase without doing your homework first. From finding the right location for a profitable rental to securing financing to choosing the right company to manage your investment, there are a lot of moving parts involved in buying a rental property. Take care of these steps first, and your investment will be in good hands.