Nowadays, investing in real estate to gain passive income piques the interest of many. And how would it not! With today's competitive market and constantly rising prices, investors' gain is indefinite. However, if you want to set yourself up for financial success, you have to make sure you're ready to bite the bullet. You have to remember that buying an investment property is so much more than just having enough money to do it. You have to have proper knowledge about real estate, current market trends, and predictions for that market in the future. Only when you're armed with both knowledge and money will you be able to do this investing the right way. Therefore, let's talk about the six signs you're ready to buy an investment property!
You have clear investment goals
There are several ways to invest in real estate: fix-and-flip, buy-and-hold, and wholesale. Therefore, investors should have a clear investment plan in mind before making a purchase. This means you need to do your research and pick the investment strategy that suits your budget and financial goals.
So, let's elaborate a little on the possibilities you have. A "fix-and-flip" method is purchasing a house, renovating it, and immediately selling it for a profit. A "buy-and-hold" approach would entail keeping the property in your portfolio for the long term and renting it out. In wholesaling, you would sign a contract with sellers to assist them in finding a buyer for their property.
Finally, the investment plan you adopt will impact the type of investment property you intend to buy. This is why it's critical to define your financial goals before you buy an investment property.
You have equity
Homeowners can frequently leverage the equity in their primary property to acquire a loan or even cover the deposit. This implies you may not have to worry about a downpayment as you did for your primary home. Let's elaborate, shall we?
Suppose we know that the equity represents the value of your property minus the amount you own for it. In that case, we can easily find out how much of the equity we'll be able to deposit towards the investment property. So, if your house is worth $700,000, for example, and you still have to pay $400,000, this means your equity is $300,000.
When deciding whether to provide you access to your equity, your bank will consider several variables, including any other loans you may have, your age, income, and the number of children you may or may not have.
If you're approved, you will typically be able to borrow up to 80% of the value of your primary property, minus what you still owe. Therefore, using the preceding example, you will be able to deposit up to $160,000 of your entire equity towards an investment property you want to buy.
Since you are effectively using your present property as security for your investment property, this can be risky. This implies that both houses will be on the line if things go wrong. Therefore, before making any decisions, make sure you are informed of the consequences and risks and thoroughly examine your alternatives with a professional.
You have savings
Sadly, unlike with a primary house, there is no such thing as purchasing an investment property with little or no money down. This is because government-backed loan programs (such as FHA) aren't often accessible for investment properties. Therefore, you'll need to have some money saved up in your bank if you want to buy an investment property.
In fact, experts recommend saving 30 to 35 percent of your anticipated buying price. Most banks need a 20% down payment and up to three months of spending in savings. You should also have enough money left for repairs to prepare the properties for occupancy.
Whether you like it or not, lenders consider the number of liquid assets you'll have after making your down payment and closing costs. They do this to ensure that you'll be able to make your mortgage payments even if something unforeseen occurs to your regular salary.
While lenders want their borrowers to have a particular number of months' worth of reserves following each transaction, the criteria for investors are frequently harsher. Therefore, you need to be armed with serious money before buying anything.
You know how to do the real estate math
Buying an investment property should be a mathematical calculation at its foundation. Therefore, before entering the market, prospective investors should get to know and understand the metrics they'll need. Fortunately, there are many rules of thumb investors can rely on during the process of buying an investment property. So, here are some of the facts nobody will tell you about that will help you predict your profits:
- 50% of a single-family home's total rental revenue is spent on running expenditures such as taxes, vacancy, insurance, turnover, and maintenance.
- You can get the time it takes to recuperate your investment if you divide 72 by a predetermined yearly rate of return.
- If you can rent out your home for 1% of the purchase price, you can meet your mortgage payments with the proceeds.
You're ready for extra responsibility
While equity is one of the best pros of investing in a rental property (or buy-and-hold investment property), added responsibility is definitely a big con of this type of investment. Being a landlord requires a significant time commitment. If you're prepared to screen eligible renters and cope with the maintenance of your rental property, you're ready to buy it. If not, then you should invest in something else.
Of course, you can always contact a reliable property manager, but that doesn't mean you don't have to deal with your investment property. After all, it's your property, not theirs.
deal with your investment property. After all, it's your property, not theirs. Furthermore, even if your objective is to fix and flip a house, you'll have additional duties. Your tasks will include budgeting, supervising contractors, and managing schedules in such a situation.
However, in any case, it's critical to realize that the passive income that comes with purchasing an investment property is accompanied by additional work. Therefore, before proceeding with your purchase, ensure that you are prepared to take on that work.
You found a team of reliable professionals
As an investor, you must have a solid team that includes real estate, finance, maintenance, repair contractors, and property managers. In addition, you'll need a team of experts to help you through the purchasing process. Buying an investment property is no joke. Therefore you need to secure yourself the best experts in town! As you start to put together your team, you'll have to do your homework. Proper research will do the job. Thus, read online reviews, ask family and friends, meet three or more professionals in person, etc. Once you have gathered all the information you need, it's time to hire all these experts!
Yes, if you want to buy an investment property, you'll have to invest more than just your money. You'll have to gain profound knowledge about real estate and finances, as well as invest your time and prepare for a lot of extra work. You need to understand one thing: buying an investment property isn't the same as buying a primary home. The bank will treat you completely differently. Therefore, prepare for expensive costs and fewer benefits to make a passive income that can set you up for life.