Purchasing your first investment property is both exciting and potentially risky, especially if you haven’t done your homework on whether it’s the right move. Real estate investing can be great for obtaining future financial security, however, numerous pitfalls can occur if you don’t look into the realities of maintaining the property.
Unfortunately, some people invest in real estate only to find out it really wasn’t for them after all. Rather than burden yourself with discovering this halfway into the game and having to sell your property, it’s time to do some serious analyzing of your life and future.
Take a look at these eight quick tips for purchasing your first investment property to see whether it’s really right for you. As a first-time property investor, you’ll see how much you have to do to make your investment profitable.
1. Eliminate Personal Debt
You don’t want personal debts getting in the way of your new investment. For instance, if you’re still paying off student loans and/or multiple credit cards, you could have issues maintaining the property you purchase. Property investing requires considerable capital, so it’s best to clear your debts first.
2. Be Prepared to Pay a Large Down Payment
When property investing — especially when purchasing your first investment property — you’ll have to pay a larger down payment because mortgage insurance doesn’t cover rental properties. This usually means having to put at least 20 percent down up front. Be sure to save up for this in advance before you invest in property.
3. Know Your Interest Rates
Some people don’t consider this at first, but when purchasing your first investment property you have to be well aware of your interest rate. Interest rates are higher when buying rental properties. So on top of coming into a real estate purchase with the 20 percent down payment, you’ll want to have at least six months of interest rates saved up so you don’t get hit with a mortgage payment you can’t afford.
4. Don’t Tackle Problems You Can’t Solve
When purchasing your first investment property, buying a “fixer-upper” can be a great option, since you can usually get the property at a lower cost. However, you need to be fully aware of what problems need addressing, and ensure that you have enough capital to solve those problems. If you’re realistic about what it will take to get the property up to snuff (time, materials, labor costs, etc.), you can get a good picture of whether or not it’s a good investment. Cosmetic upgrades are generally easy, inexpensive fixes. But if the property needs major structural repair, you may better off avoiding the purchase altogether.
5. Ensure you Have the Time to Do Repairs
Whether you build up a fixer-upper or purchase a property that’s move-in ready, you still need to keep up with regular maintenance. First time property investors often underestimate how much maintenance is involved in owning a property, so be sure that you have the time and money to invest in regular repairs and updates. You can hire someone to do this for you or to handle the property management process.
6. Know Your Operating Expenses
For operating expenses, it’s best to use the 50 percent rule: assume that half of your income from your property investment will go into expenses (not including your mortgage). In general, though, operating expenses could range anywhere from 30-80 percent of your gross operating income. Knowing what your operating expenses will be will help you know exactly how much you need to charge for rent.
7. Figure Out Your Margins
It can be challenging to set margins, but doing so is vital when purchasing your first investment property. Generally, setting a 10 percent goal on return is a realistic percentage, but also consider that 1 percent of your annual costs will go toward maintenance. And, don’t forget to calculate things like monthly premiums on housing insurance and your property tax expense.
8. Choose the Right Location
Even the most novice real estate investor has heard the adage of “location, location, location.” When purchasing your first investment property, be sure to study the surrounding area, paying close attention to property taxes, crime rate and nearby schools. Also, the closer the property is to malls, parks and restaurants, the more likely you’ll be to gain quality renters.
Smartland is Northeast Ohio’s largest turnkey real estate investment firm. Our team combines financial savvy with expertise in property management to help clients identify and invest in alternative investment vehicles that have strong growth potential.