If one of your goals this year is to buy an investment property, this article will help you learn more about how many folks take that first leap. It also provides questions you should ask yourself as you start the process.
Getting started is almost the hardest part in anything and it can be especially intimidating with real estate. We’re here to help! With every situation being unique, we’ve gathered together some questions along with helpful information for you to think about as you start your journey.
Real estate is one of the best possible investments you can make. Your primary home is a great investment. As you make payments and as your home appreciates, you are building equity in a solid investment. You can even borrow against that equity to buy another property! The questions below hopefully help you as you start the process of owning an investment property.
Biggest question: How will you pay for it?
If you’re planning to finance your purchase, please connect with a trusted lender who can help guide you through the process. Typically, interest rates are higher on an investment property and you are required to put down a larger down payment. There is an interesting way to use a FHA or VA loan: buy a duplex, triplex or quadplex, live in one unit and rent out the others. This is an incredibly smart way to have all of the benefits of a primary mortgage with a low down payment and also begin your investment portfolio. Other things to consider: if it’s a condo, is it considered a condotel? Different financing options have different lending requirements and your personal financing situation impacts everything. Having a trusted lender when deciding how you can pay for it is critical. We work with tons of lenders and we’re happy to connect you with amazing partners like Jenny King.
How will you use it?
If you plan on renting the unit, will you rent it short term or long term? Is the property zoned correctly for its intended use? Is there rental history to support the income and was the unit rented as aggressively as it could be? Do you plan to rent it out yourself? Does the condo building allow you to self rent it (Many require you to use their onsite rental services)? Do you have the time to manage it yourself and do you have cleaners and maintenance people ready for your investment property? I always recommend using a property manager. They are skilled managing renters and I personally use Byrd Palmer Property Management for my long term rental properties. Background checks, credit checks and regular checkups on the property are critical to protect your investment.
How much money do you plan on making?
Having a minimum return on your money is important. Determine that number and do your best to stick to it. Realistically, that number is going to be less than 10%. We all want to make 20% return on our investments. I always encourage people to pursue any opportunity that has a high rate of return. For example, if I talk to an investor who only wants a 12% return on their money, I ask them if they have other investments, stocks, bonds mutual funds, etc that bring that high of return. If they say yes, I tell them to buy more of those and to please tell me what they are so I can buy some too. Waiting to buy a unicorn that doesn’t exist has stopped a lot of people from owning real estate. Today’s overpriced investment is tomorrow’s gold mine. Almost every investor I know wishes they would have bought more real estate in the past. Be willing to pay market value for a property when the numbers are right.
How do you know when the numbers are right?
One of the best calculations to use for real estate investing is your cash on cash return. There are a lot of online calculators but it basically measures the cash flow divided by your cash invested. For me, I’m happy anytime a property pays for itself. If I can buy a property and the renter is paying it off for me, I’m thrilled. When I retire, I’ll have a paid off property that has appreciated over the years and the renter has paid for it all. If I can find an investment property that not only pays for itself but makes additional money, I personally think it’s a great option. If one of your goals is retire in an oceanfront condo, buy it now and let someone else pay for it.
What other questions do you have?
Every situation is different and we’re happy to help. Do you want to know more about flipping houses? It’s competitive and risky but it’s lucrative! Want to know how to identify the best piece of land to buy and hold while it appreciates? We can help you understand local trends and connect you to resources to help you with your research. You don’t have to do this alone! Please don’t hesitate to contact us and we’ll help you determine if this year is your year.