A Guide for Buying an Investment Property
Investment property ownership is another way to build your wealth through income generation. You buy an investment property, improve it, and rent it out. Alternatively, you can fix and flip. Either way, here is a guide for you to grow your business and make buying an investment property as hassle-free as possible.
Identify and Understand the Risks
You should understand the specific risks associated with buying an investment property as a form of real estate investing.
First, investment property requires a time commitment. You have to be active and proactive. Basic knowledge is sufficient, but immediate success would mean extensive experience.
Second, investment property isn’t liquid. It will take months to sell one property if you’re going the fix-and-flip route.
Third, investment property requires considerable capital. You’ll need at least 20% for the down payment and closing costs, plus a vast reserve of money for financing payments.
Lastly, investment property is quite unpredictable in terms of income generation. You may experience a vacancy for months at a time, or you might have renters year-round.
Hire Experts and Professionals
Managing an investment property is rarely a one-person team, even for expert real estate investors. Surround yourself with a group of professionals such as:
- -real estate agents
- -legal advisor
- -insurance agent
- -appraiser
- -home inspector
- -property manager
These professionals must have extensive knowledge of real estate property. They should give you expert advice on what and how to invest your money into a property wisely.
Decide the Investment Property to Buy
Be specific on your goals because buying an investment property isn’t for everyone. Consider several factors to decide which investment property to buy.
Type of Property
Investment properties range from single-family homes to multi-family unit buildings, from low-cost to a high-cost condo. Multi-family refers to two to four units for financing. Five or more units require commercial financing, which isn’t the right choice for beginners in real estate investing.
Cost/Price
The cost could include a 20 to 25 percent down payment, closing costs, and other related fees. It would also help if you had at least 6-month worth of money for mortgage and financing payments.
Location
This is critical in your success as a real estate investor. Choose a property located in a booming neighborhood. It doesn’t have to be bustling, but a community with enough school activities, nearby malls, and expansion potential is ideal.
Level of Effort
You can buy a property that is ready for rent and requires little to no improvement. However, the best value sometimes comes from properties that require a bit of care. However, this would mean additional work and cost for you.
Find Ways to Pay
You can either pay in cash or secure financing. If you’re paying in cash, you can skip this step. If you’re going the financing route, you need to understand the different financing types and how it affects your income potential. Speak to your financial advisor or bank to determine your financing options.
Conventional Financing
This refers to getting a mortgage loan through a financial institution with your qualifications as a real estate investor. The type of loan depends on several factors such as your credit score, the type of investment property, assets, liabilities, and current source of income.
Asset-based Loans
You can obtain a loan using the projected income of the investment property you’re going to buy. The lender will still consider your credit score for determining the interest rate. However, other qualifications such as assets or source of income won’t be considered.
Other financing options
- Second-home financing – This route usually means a lower down payment and easier approval qualifications with a condition to using the property as your second home
- House-hacking – This type involves a low down payment when buying a multi-family property and living in one of the units as a primary residence
- Home equity – This type includes using the home equity of your current primary home as a qualification for a loan
- 401K loans – You can use this option only if your plan allows such financing investment property.
Calculate Cash Flow
Realistic cash flow is subtracting expenses from your expected rental income. However, you have to consider the opportunity cost and maintenance expenses during vacancy months, which can range from 15% to 20% of your total projected income.
Learn and Re-evaluate
Mistakes could happen on your first time buying an investment property. However, you learn and re-evaluate these mistakes. Use what you know to improve your system and increase your income.
Buying an investment property is an excellent business venture. However, don’t forget to get MD Investment Property Insurance to protect your properties and your business.
About Moody Insurance Worldwide
Moody Insurance Worldwide, a division of Moody & Associates that was founded in 1914, is a leading provider of risk management programs and insurance coverage to individuals and businesses across the East Coast. We write all sizes of businesses, with technical expertise in many key industry areas, and provide personal insurance programs for estates and high net worth individuals. Our licensed, experienced commercial account managers can work with you to determine the coverage that you need at a competitive rate. Contact us today at (855) 868-0170 to learn more about what we can do for you.