What To Consider When Buying Investment Property | Murrieta Property Management
For those with an entrepreneurial spirit and go-getter attitude, real estate investing can be a profitable and rewarding endeavor. From the additional cash flow and tax benefits to the ability to be in control of your investment, real estate is a smart investment that can really pay off in the long run. If you’re considering buying an investment property, consider these 6 things before moving forward.
Plan out your investment property expenses
The most important question you need to ask yourself before investing in real estate is “can I afford it?” Yes, in a perfect world, you will put a little bit of money in and get a whole lot out. But it’s not always that simple. Real estate is different than other investing options because you have to regularly put money into it in order to regularly get money out of it. Buying and maintaining a home is not cheap, and although the payoff may be tempting, if you’re not in the financial spot to shell out a good amount of money now, you don’t want to put yourself in an even worse financial situation down the road. If you’re already in a lot of debt, it may be wise to take care of that first before investing in property.
Consider your investment property down payment
Investment properties usually require a bigger down payment than traditional home purchases, and the approval process can be stricter and more detailed. If you put 3% down on the house you live in and plan to do the same thing for your investment property, think again. Aim for closer to 20% since mortgage insurance isn’t available on rental properties.
They make it seem so easy on the DIY channels, where people buy a house, add a coat of paint, sell it for thousands above what they paid for it and sail off on their new private yacht. It’s not going to be like that. There are operating expenses, taxes and higher interest rates to consider, and you have to be realistic about the money that it’s going to take to eventually get a profitable return on investment.
Understand what’s involved in owning an investment property
How would you rate your overall DIY-ness? Are you the kind who can fix a home repair issue with no problem, or are you a more of a “call the professionals” kind of homeowner? If you’re relatively handy and know your way around a toolbox, managing a home on your own may be feasible. However, if you don’t know the difference between a flathead and a Phillips, or you’ve never been the best when it comes to electrical and plumbing issues, hiring a management company to oversee the maintenance and repairs of the property is something to consider. The management fee will have to be factored into your expenses, but if you don’t have the time or skill to properly maintain an investment property, paying someone else to do it for you is worth it.
If this is your first time at the investment property rodeo, a fixer-upper may not be the way to go. Unless you’ve got a contracting buddy who’s willing to help you for cheap, or you’re a pro at all things DIY, you’ll end up spending more money on repairs and restorations and lose money in the long run. Be realistic about your budget and your skill set to avoid long-term issues and headaches.
Location, Location, Location
You could spend thousands of dollars on a property, and even more on fixing it up, but if it is in a shady neighborhood or far away from modern conveniences, you may have a hard time selling it (aka making any money) Avoid the temptation of buying a home in a questionable or remote location just because it’s cheaper. It’s worth waiting for the right property that people will actually want to come tour and hopefully buy.
Rental Income Fluctuates
Having renters in your property usually means a check in your mailbox. Usually. Tenants are only human and can be late on rent, short on rent, and in some horrible cases, not pay at all. If you are completely dependent on the rent check for your day-to-day living expenses, one hiccup from the renter could put you in a bad spot. Make sure, especially in the beginning, that the rent check is a nice bonus, not what you’re depending on to make it through the day. Once you gain some experience in the investment world, have done it a few times and own multiple properties, you will begin to see the exciting and very profitable side of real estate investing. But when you’re first starting out, start small.
Investing in real estate has is pros and cons, but if well thought out, planned and executed, it can be an exciting and profitable way to make money. As with any major project or life decision, weighing all of your options, listing advantages vs. disadvantages, talking with people who’ve done it before, and making smart decisions (not emotional ones) will transform you into a real estate investment pro.