Purchasing a rental property is a popular way to invest money and generate passive income. But as with any form of investment, it’s important to know what you’re getting into before making a final decision. Investing in real estate does not come without risk! Thorough research will help you minimize your risks and ensure your investment property is set up for success. Here are some essential things to keep in mind as you get your feet wet in the wonderful world of real estate investment.
Do Your Research
When buying investment properties, it’s important to make decisions based on evidence rather than emotions, assumptions, or gut feelings. There are several different factors to consider when searching for the perfect property. Is it a good time to purchase a property in the area? Will your rental still be profitable after your monthly expenses? Can you attract high-quality tenants to the rental? Take the time to research the local job market, nearby amenities, rental rates, ongoing maintenance costs, and anything else that may influence your decision.
Use online resources and calculators to come up with property prices and other cost estimates in the area where you’re hoping to buy. For example, homes in Eugene are selling for about one percent below list price and spend an average of 30 days on the market. This kind of information will help you determine what you can afford and how to best compete with other buyers for the property you want.
Save More for a Down Payment
Another important thing to plan for is the down payment on your investment property. Many people don’t realize that they need to make a much higher down payment when purchasing a second home compared to their first. According to LendingTree, you will likely be required to make a down payment of about 15-20 percent if you’re buying an investment property that you don’t plan to live in yourself.
Keep in mind that you will need a very good credit score to qualify for a down payment on the lower end of this range. Your debt-to-income ratio will also affect your mortgage eligibility. Mashvisor recommends a debt-to-income ratio of 36 percent or less, but an even lower ratio will help you get the best possible mortgage rates on your investment property.
Consider a Partnership
Purchasing an investment property with a friend, spouse, or business partner can be beneficial for new investors who don’t have a lot of capital to get started with. Not only can this help you out with the down payment, but also with ongoing expenses like property taxes and repairs. If your partner has experience in real estate, even better! They will bring skills to the table that you may be lacking as a first-time investor. Before you jump into a partnership, talk about your goals and discuss the division of responsibilities with your potential business partner. It’s a good idea to get everything in writing and set up a legal partnership as well.
Plan Your Management Approach
Real estate investors take different approaches when it comes to managing their properties. Your management approach will depend on a variety of factors including your financial goals and your time availability, but also whether you choose to rent your property out short or long term. Vacation rentals, for example, require more attention to marketing and attracting guests than long-term rental properties.
Finding tenants, screening applicants, maintaining the property, tackling emergency repairs, and collecting rent often end up being more work than investors realize. If you want to earn the highest profits possible and you have the time for a hands-on approach, it may be in your best interest to tackle all your management responsibilities on your own. Hiring a property manager can take some weight off your shoulders but will also cut into your rental income. Ensure your rental will still be profitable if you decide to go this route!
Putting a down payment on a rental property is an exciting introduction to real estate investing. Do your research, budget wisely, outline your management plan, and consider working with an experienced partner to maximize your chances of success. With good planning and a lot of hard work, purchasing an investment property can be an extremely rewarding venture.