Super low interest rates and increasing rental demand are making now the most ideal time to buy an investment property to increase cash flow. However, there is a lot to consider to make sure the decision to buy one is right for you. Here are some major items to think about to make a good purchase:
Consider the investment property in context. If it’s a vacation property that you’re after, make sure it’s in a place people take vacations!
2. The Down Payment
Typically for an investment property, you need to put at least 15% to 20% down. Your credit score, income and DTI (debt-to-income ratio) are the factors that determine how much is required. Like all real estate purchases, it’s important to have financing in place before searching for properties.
3. The 1% Rule
Basically each month should bring in no less than 1% of the price you paid for it – including the purchase price and anything additional like repair or renovation costs. For example: you buy an investment property for $225,000 and put in $25,000 worth of renovations for a total initial investment of $250,000. Ideally, you’d want to be pulling in at least $2,500 per month in rent or other returns. Use an investment property calculator, which can tell you what you’ll make on the property after accounting for financing and expenses.
4. Fixed and Variable Expenses
Budgeting appropriately every year for the expenses is important for a successful investment property. Take into consideration the fixed expenses like property taxes, homeowner’s insurance, property management expenses (if applicable), HOA fees (if applicable) and general upkeep costs. Variable expenses are things like replacing appliances unexpectedly or repairing exterior damage after a storm.
5. Property Management
Hiring a professional property management company vs. being a landlord and involved in everyday operations. While hiring a company can sound expensive, it may be more cost effective in the end. For example, a vacation rental that needs to be marketed on various websites – which tend to charge booking/leasing fees. With a property management company, you might just have to pay a set commission fee per rental—usually around 10%.
6. The Risks
Be sure to anticipate things like:
The property may not generate rental interest.
Unforeseen expensive repairs.
Significant increase in property taxes.
A change in the local market.
Bad tenants – resulting in repair/eviction costs.
The bottom line is that an investment property can generate very significant income. Be sure to work with an experienced advisor and thoroughly evaluate all of the factors above to ensure the right purchase for you. As an experienced real estate investment advisor, I am happy to be a resource if you are considering an investment property.