By, Lisa Roberts
Buying an investment property is a huge step, especially your first one. When planning this project, it is crucial to set yourself up for success. You want to make all the right decisions, minimize expenses, and have a return on investment as quickly as possible. However, before you even start this project, you need to understand if you are ready to buy an investment property or not. A wrong decision in a bad moment will cost you a lot.
What are the signs you are ready to buy an investment property?
Generating income from an investment property is the perfect work-from-home job. But, before you can make your dream come true, you need to make sure you are acting in the right moment. The signs you should be looking for are:
- you know what your goal is;
- you saved enough money to support this project;
- there are no unanswered questions;
- you can take on more responsibilities;
- there is a team of professionals backing up your decisions;
- you understand the risks of the project, and you are ready to tackle them head-on;
Let’s go through this list one item at a time, and give you a bit more information.
Set your goals first
You cannot just purchase an investment property and think that’s a done deal: the money will just start coming, and you are set for life. There are so many nuances to think about and potential problems to tackle. You need to treat buying an investment property as just like starting a new job.
Where are you getting your capital from? How much are you willing to invest? What type of property should you buy? At what location? What will you do with the property? Who are your clients? How long till you start making money? How will you manage the property? What can go wrong?
You need to take all of these questions and more into consideration before you make a purchase. It’s best to define your goals and know exactly what you want to do before doing it.
Can you support this project financially?
Government-backed loan programs are not usually available for purchasing an investment property. That’s why you need to have some money on your account before you can consider making a purchase. You need to have at least 30% to 40% of the property price on your account.
Banks usually ask for a 20% down payment, but they also want to see that you can cover additional expenses for at least three months. You need to have that money in your savings account. On top of that, you should be able to afford to do some apartment repairs on the property after you purchase it, so it is ready for renting. If you are buying an empty lot and intending to build an apartment complex, you need to be able to start that as soon as possible.
This is necessary because lenders want to ensure that you have enough money to continue paying the mortgage. The requirements are stricter for investors.
Do you understand the math behind the project?
When it comes to buying an investment property, it all comes down to doing the math correctly. Understand your metrics and the cash flow before buying.
While there are many rules of thumb you can follow, these three should help you out the most:
- The 1% rule: You should be able to cover your monthly mortgage payment by renting the property for 1% of the purchase price. This is very important because it provides you with security in case you have problems with the cash flow;
- The 50% rule: Managing your investment property will cost a lot of money. If you take the gross rental income of a single-family home and divide it by 2, that’s how much you will have to spend on average to cover any operating expenses;
- The rule of 72: When it comes to significant investments, it is essential to know how long it will take to recoup the investment. If you divide 72 by the fixed annual rate of return, you should get that number.
These three rules should help you do the basic math before purchasing an investment property.
Are you ready to invest in your first property?
Managing an investment property will require a lot of time and effort. As we have said before, it is a 24/7 job. It is a massive commitment to be a landlord, and you need to be sure you are ready for that.
Understand the maintenance process first, and make sure you know how and where to find qualified tenants quickly. On top of that, be ready to balance your budget, work with the contractors, take care of delivery schedules, and so on.
Do you have the people who will help you with the project?
Going into this project on your own is not impossible, but it will be very challenging. It would help if you had reliable and knowledgeable people who understand real estate, lending, contractors, maintenance, building management, and so on.
Furthermore, if you purchased a property in a different city and need to move long-distance, you need to find someone to help with your project until you relocate. It is possible to find assistance with ease, so you don’t have to manage your relocation while closing the deal on the property.
All investment properties come with a risk
It is not possible to invest in an investment property without risking something. You need to understand that, accept it, and be ready to deal with the consequences. There is no profit without risk. However, a good thing to know is that owning a property is far less risky than starting a classic business and failing. You can always sell the property and take back a large portion of the money invested. If you are ready to buy an investment property, do the math, be patient, and your effort and investment should pay off! With that in mind, best of luck with this project!