Purchasing an investment property is an ideal strategy for generating income and building your net worth, however, it also comes with risks. Before you jump into owning rental property, understand the different factors involved — financing options, agents, the selection process, to name a few — to help you weigh the pros and cons of investing in real estate.
To make an informed decision on whether buying investment property is the right financial move for you, check out these tips for investing in real estate property.
Steps for Buying an Investment Property
Purchasing property for investment can be an effective way to increase your income. To do it correctly, follow a few critical steps.
Here’s how to buy an investment property:
- Determine the financing methods.
- Locate a real estate agent.
- Select the right investment property.
- Study the local market and other factors.
- Know the types of investment properties available.
Keep reading to learn more about the details of each step.
1. Explore Financing Methods
Buying an investment property requires having some sort of financial plan in place, such as obtaining an investment property loan.
You have a couple different options if you want to finance a house: cash or no money down. If you’re paying in cash, you’ll bring a certified check to the title company for the agreed-upon price, then close the transaction between with the seller.
As for how to buy an investment property with no money down, you will have to finance it by holding the mortgage and making monthly payments to the seller or the bank. Because most people don’t have cash in full when purchasing a house, getting a mortgage can be a more feasible option.
2. Find a Real Estate Agent
When you’re buying your first investment property, it’s critical to use a real estate agent. Real estate agents have knowledge of the markets and can offer recommendations for other professionals, such as attorneys and appraisers, making it easier investing in rental property for beginners. Agents can also learn the market and create a strategy to locate the best property that generates consistent income and increases in value. Additionally, the person buying rental property doesn’t pay the agent’s commission; instead, it’s covered by the seller at a rate between 5 percent and 6 percent of the total sale price.
3. Select an Investment Property
Selecting the right investment property requires looking at a number of factors like the neighborhood, home value, continuing costs and tenants. The upfront investment of purchasing the rental property includes closing fees, taxes and transaction costs. The continuing expenses are the maintenance, insurance, and legal and management costs.
Although the type of neighborhood will vary and play into the cost, the best properties usually have the potential to increase in value over time with rising rental rates. Furthermore, who the tenants living in your home are will depend upon their income levels, credit history and how much home they can afford. The basic idea is to objectively evaluate the costs and determine the best ways to generate income and realize an appreciation in value.
4. Study the Local Market
The real estate market is decentralized, which means it’s crucial to evaluate the neighborhood and community for your long-term profitability. Because the local economy will influence the demand for rental properties, buying a home in a lively neighborhood, or even an up-and-coming neighborhood, is a good investment.
For instance, the presence of a major corporation — like Google or Amazon — will have a positive impact on rentals in the neighborhood. As all the renters move in, so do the shops, restaurants and bars, ultimately forming a community. The key here is looking at big employers, local amenities, lively communities and property values.
5. Know the Types of Investment Properties Available
A couple different types of investment properties exist: residential and commercial. Residential properties are subdivided into single- and multi-unit properties. A residential house or a condominium that’s rented individually is considered a single unit. With a multi-unit property, more than one renter lives on the property, such as a duplex or an apartment building.
As for commercial property, it’s divided into retail, office and industrial space. Retail properties are rented out to stores that sell goods directly to the public and require a storefront for conducting business. Office properties are rented to professionals such as accountants, attorneys, doctors and investment bankers and are places where they can carry out their work in a private space. Lastly, industrial properties include shipping facilities and storage units where manufacturers can conduct business operations.
All of these properties are subject to change in price based on the economy and the demand for them. Overall, buying an investment property can be profitable, but the key for being successful requires understanding some basic facts about financing, real estate agents, investment properties, neighborhood communities and the types of investment properties available.
Keep Reading: 5 Easiest Ways to Get Into Real Estate Investing Now