Everyone wants to be a real estate mogul, all over the world some of the most successful and wealthy people have become so via real estate investing. But where do you start? What steps can you take to make it all a reality? Take a look at the steps below before embarking on your journey as the next great real estate investor.
1. Obtain the Down Payment
Investment property loans usually demand a larger amount of down payment than an owner-occupied mortgage loan. The zero money down and 3-5% down payment programs will not work when financing an investment property. When buying an investment property you can expect to need at least 20% for down payment.
2. Get Pre-Qualified for a Loan
Before you run out and go shopping for your future income property you are going to want to get a pre-approval from your bank or a mortgage lender. When buying an investment property it is probably best to go with a lender that has experience with rental property loans.
3. Calculate, Calculate then Calculate Again
Individuals looking for income property should aim for a goal of a 10 percent return. Initially, a 5 to 6 percent return in the beginning 1 to 2 years of buying an investment property is considered acceptable, especially considering that percentage should increase over time.
4. Don’t Buy a Distressed Property
Although the temptation to buy a fixer-upper or distressed property may seem like the best idea, it is not highly recommended on your first income property. Unless you are a licensed contractor or have access to one who will do quality work for a CHEAP price – or you have extensive experience with large-scale construction improvements – you will likely spend an exorbitant amount of money just to make your new investment property rent-able. When you first start out investing in rental properties, it’s best to stick to properties that require mostly minor repairs.
5. Talk to an Accountant
Buying an investment property has many tax advantages. However, some of those advantages such as depreciation have consequences at the time the property is sold. This may, or may not affect you financially depending on if you are holding the property as a long term rental or expecting to liquidate it within a short time period. It is best to have a long term plan when investing in rental properties. Set financial goals and monitor them frequently to make sure you are on track.
The bottom line is that like many other investments, buying an investment property is a large step in anyone’s life, especially when you are first starting out.
Getting off on the right foot is so important and picking the wrong property or going with the wrong financial advice could be a substantial mistake.
Consider working with us to prequalify for financing when buying an investment property. We have over 20 years experience with investment property loans and can answer any questions that you may have.