The real-estate market become more dynamic and intricate than it used to be a decade before. That is why buying an investment property still remains one of the most cumbersome affairs for first-time buyers. Investment property, as the name suggests, refers to a type of property that doesn’t provide the benefits of the primary property. Meaning- it cannot be used as a regular residence. Buyers usually procure investment property with the intent to reap monetary benefits, either via selling or renting. Availing mortgage approval for such a property isn’t easy owing to their risky profile. Therefore, it is ideal to find a realtor who has expertise in dealing with such properties.
Key Facts to Ponder Before buying an investment property
- Investment property attracts stringent legalities, unlike regular properties or residence
- Lenders usually charge 20% upfront charges for mortgage approval against such property.
- Investment property cannot be used as a regular home by the owner. They can rent it, but they cannot live there.
- Investment property is only used to reap profit, either via renting or selling.
- According to banks, investment property is risky as compared to primary properties, so mortgage approval can be an issue for the credit-seekers.
Tips for buying an investment property that is worth your spending
Check your finances
Investment properties require a higher level of financial stability than primary residences, particularly if you plan for renting. Most lenders require credit-seekers to have at least a 20 percent down payment for such properties, which is way higher than what is required for a primary residence. Additionally, such properties are required to avail approval from an inspector before renting.
Make sure you are financially sound to address the cost of property procurement and its maintenance. As an owner, you must repair the property for any damages in a timely manner. This can translate to costly HVAC and plumbing repairs. Some states permit tenants to hold back their renting funds if they fail to repair the property for potential loopholes. Make sure to append buffer costs to your budget for regular and emergency home repairs. If you are not at good financing, better find a realtor to get things done.
Make sure positive ROI is there
Real estate investors procure investment properties for none other reasons than positive cash flow. However, smart investors have a different take on that as they compute their ROI rate before making a property purchase. To estimate the ROI on investment property, comply with the following steps.
Compute your yearly rental income
Look out for identical properties that are currently available for rent. Determine the average monthly rent concerning the type of property that you are planning to buy, and multiply that rent by 12 for the income worth of a year.
Find your total operating income and ROI
Post estimating the yearly rental income; compute your total operating income. The latter is equivalent to your yearly rental spending minus yearly operating cost. Your operating cost is equal to the overall amount of money that is required for property maintenance every year. Some costs include property taxes, insurance, homeowners association, and maintenance. Avoid appending your loan or interest to overall operating expense estimation. Subtract your operating cost from the yearly rent valuation to determine the net operating income.
Next, divide overall operation income by the overall valuation of your loan to determine your overall ROI.
Investment property management is not as easy as it seems. It involves a lot of hardship such as advertising space, confronting tenants, checking tenants’ details, and performing regular maintenance and repair to keep the property intact. Also, you have to comply with the tenant’s “right to privacy- a legal requirement that prevents you from making an informed visit at the tenant’s doorstep. Before you decide to make a purchase, be sure that you have ample timeframe to maintain and probe your space. Buying an investment property is not easy, so be well-prepared and proceed accordingly in light of the above facts.