Real estate is perhaps one of the top pickings when it comes to finding quick, easy, and profitable investment options. Thanks to easy-to-obtain property mortgages and property loans, anyone can get into the business with some funding. It involves buying real estate to generate income.
However, purchasing an investment property isn’t as simple as choosing from a list of options on a shelf. It comes with challenges, including strict financing requirements (large down payment and high-interest rates) and maintenance costs. Typically, an “investment property for sale” has higher monthly mortgage payments compared to primary properties.
While the best way to go about it is to work with an experienced and renowned property Management Company such as RTI properties, gaining some basic knowledge can also help you make an informed decision.
If you’re considering purchasing an investment property, you have come to the right place. Let’s go over everything you need to know about picking the right investment property.
Table of Contents
- What is an Investment Property?
- What Makes a Good Investment Property?
- Why You Should Invest in a ‘Good’ Property
- Things to Consider When Buying an Investment Property
- How to Pick the Right Investment Property
- Picked the Right Property? Learn How to Invest with Minimum Amount of Money
- Summing Up
What is an Investment Property?
As described above, purchasing an investment property allows people to generate income via resale or renting a property that is not their primary residence. You can invest in both residential, such as townhouses, single-family homes, and condominiums. You can also invest in commercial properties like restaurants, hotels, and retail shops.
When investing in residential properties, you can make money by renovating a property to resell it for profit (house flipping) or collecting rent through rentals. It’s common for investors to hold the property for a long time or wait until the value increases to sell it.
According to the National Association of Realtors, most investors prefer investing in detached single-family houses. However, it is always better to seek the assistance of an experienced or professional realtor to find the best property to invest in.
What Makes a Good Investment Property?
The primary criterion of buying an investment property is potential cash flow for many investors. Ideally, the amount your tenant pays should exceed your expenses. However, you must evaluate the profit potential of your investment property by taking factors like “reasonable rent of the property” into account.
The 2 percent rule, for instance, is one formula you can use to evaluate the profit potential. The formula indicates that your total rent for the month is equal to 2 percent of the total buying price plus required repairs.
Moreover, investors must look for four things before purchasing an investment property, including:
- Population and job growth
Growing infrastructure is an indication that the value of the properties will increase over time. Also, investors should keep in mind that not all investment properties generate healthy cash flow. That is why analyzing every single property is crucial. It would help if you determined the massive expenses that decrease value and affect income as well.
Why You Should Invest in a ‘Good’ Property
Selma Hepp, CoreLogic’s Deputy Chief Economist, says it is critical to choose an area that has a steady stream of tenants when buying an investment property. Plus, property owners should have sufficient knowledge of rental laws, which can vary by city or state.
They should also be aware of the potential for renting delinquent tenants.
When you buy a property after considering things mentioned above, an investment property:
- Rises in value so that you sell and earn a profit over time
- Allows you to benefit from rental property’s tax deductions such as mortgage interest, expenses like repairs, advertising, insurance, and property taxes
- Generates consistent and steady income from renovated long-term rentals
- Enables you to pay the mortgage with income generated from rentals and build equity in the house
Things to Consider When Buying an Investment Property
Purchasing an investment property is a wise financial decision, but only if you do it the right way. It can give you a strong return via passive income, equity gains, and tax breaks. However, it is crucial to keep the following factors in mind to determine whether it is good.
Note that “location” is the most crucial factor you must consider while buying an investment property. No matter how stunning a vacation home you’re interested in buying, it will not have much luck if it is in an area that few people tend to visit.
For instance, investing in a fixer-upper is not a good choice in a less competitive market. So, always think of the location first before the property itself.
» Property Mortgage Rates
It is worth mentioning that the process of obtaining a mortgage for an investment property is different from that of a primary residence. The down payment requirement can be over 15 percent to buy a single-family investment property and can increase up to 25 percent for a multifamily unit.
Furthermore, investors need a credit score of 625 to qualify for an investment property mortgage. That is to say, if you’re considering getting an investment property mortgage, it is best to shop around at different money lenders to get the best mortgage rates or property loans.
Generally, you need to meet the following standards to qualify for a property mortgage:
- Down Payment
- Credit Score
- Variable Expenses
An investment property is beyond just a one-done purchase. That means besides the purchase, there are several expenses inherent in maintaining the property, whether it is a variable or fixed. Moreover, you can’t always make an accurate estimate of how much these will cost.
You must budget appropriately to ensure you don’t end up in trouble.
Some fixed expenses that you need to consider are:
- Property taxes
- Homeowner’s insurance
- HOA fees (if applicable)
- Property management expenses
- General upkeep expenses (landscaping, cleaning, etc.)
How to Pick the Right Investment Property
Once you decide to buy an investment property, this is when the fun begins. One question that every first-time real estate investor has in mind is “how to pick the right investment property.”
Here are some ways you can pick or find the right investment property.
» Think of Total Return
When it is about buying an income property, the “return on investment” is a crucial factor. While it is essential to consider the near term, it is just as important to think about the long term. That means you need to figure out how much income you want to generate in the coming years with an investment property.
Consult experts like RTI Properties to help you crunch these numbers. Their competent property managers provide institutional quality, data, tools, and analytics so that you can understand key metrics, including cash return, for over three years.
» Assess Location
Location is a “mantra” for real estate experts. You must research out-of-state and out-of-town properties to find the best-selling properties. Look for cities with growing wages, a young workforce, household growth, and increasing property prices to start with.
Also, consider affordability, availability, and lifestyle when thinking about the market you would like to buy a rental property in.
» Check Property’s Age and Neighborhood Qualities
Age can be a crucial factor when investing in a real estate income property. That is why considering the age of the investment property and the neighborhood’s condition is important.
Don’t buy old homes at a low price if you don’t have much capital to invest in renovations. Instead, buy an average property that’s a couple of years old and on the best block.
Plus, check neighborhood rating to weigh the potential benefits and risks of buying in a specific locale. It is a powerful logarithm that includes factors like median home values, school rating, and percentage of occupied homes.
Make sure you invest in a market with growing or stable rental demand, as it is a major factor all investors must consider before picking an investment property. You want to avoid putting your cash flow on pause.
Consider the following to evaluate rental demand in a real estate market:
- Population growth
- Vacancy rates
- Number of available listings vs. rental units
- Number of days on the housing market
Picked the Right Property? Learn How to Invest with Minimum Amount of Money
Let’s admit, it is easier to venture into just about any investment domain if you have enough cash. But if you want to achieve financial independence in a way that’s effective, saving a lot of money is crucial.
When looking to invest in properties with little money, it’s important to identify, understand, and take advantage of others’ money. After all, investors need some amount of money to make a down payment.
Here are some excellent ways to buy an investment property and achieve financial freedom.
» Creative House Hacking
House hacking is one of the tried-and-tested ways to begin investing in properties. It typically means you determine a way to make rental income from your properties. For instance, a unique house hack is moving into a multi-unit property, such as a duplex or triplex, and then using the extra units to rent out for additional income.
If you want to be more creative, you can rent out extra rooms or get roommates. Renting out your guest house, basement apartment, and even any extra space on an RV (if local laws allow you) is another excellent idea.
» House Flipping
If you have seen home flipping shows on television and think that it is a difficult strategy for yourself, you might be wrong. House flipping is an easy strategy to get started with real estate investment. Turn an investment property or house into a flip by using the popular method called “Live-In Flip.” It is one of the best investment strategies that take advantage of the most lucrative and money-spinning tax laws in the US.
You need to buy a house and live in it for a minimum of two years. Once this period is over, sell the house to make a profit. You don’t have to pay taxes or any additional amount up to $250,000 if you are single, or $500,000 if you are a couple and filed taxes jointly. It is, without a doubt, a HUGE amount when it comes to qualifying for tax-free profit.
In a nutshell, to start making a steady and consistent passive income, investing in real estate is, without a doubt, an excellent idea. It is because real estate investing is a combination of stable cash flow, safety, and reliable odds of capital gains. We here at RTI Properties have given some tips and tricks to help you pick the right investment property. Try them out to begin your journey as a successful real estate investor and give us a call at (310) 532-9122 for all your investment property management needs!