Buying a rental property is a valuable way of generating income before or during retirement. Real estate has made a lot of people wealthy, so there are lots of reasons to think that it is an excellent investment.
Just like in other major decisions, it’s better to be well-versed before diving into the investment with your hard-earned money. To guide you into a successful investing experience in real estate, consider these six factors:
1. Comfort Levels of Being a Landlord
Real estate is not an industry you should get into without extensive research. There are so many property types to invest in and ways of being a real estate investor, and some strategies may not be right for you.
Start by identifying which option fits your interests, goals, and skill levels. Then, learn the basics of that type of investment, your financial options, and the risks.
2. Down Payment
Investment properties often require a larger down payment than residential properties. They also have stricter approval requirements. You would usually need a 20% down payment, especially if mortgage insurance isn’t available on the property.
3. Financing Options
Although paying with cash generates a positive cash flow, financing gives you a higher return.
If you do choose to finance your investment property with a bank loan, figure out if banks will agree to lend to you. Make sure your credit score qualifies you to take out a loan for the amount and interest rate you want. If you wish to get good rates and terms, consult with a mortgage broker.
4. Type of Property
Should you invest in single-family homes, condos, or townhouses? Knowing which type of property to purchase narrows down your search. You’ll also determine how you can promote your property to prospective tenants.
5. Neighborhood
Choose an investment property in an area where prospective tenants will want to live. A key factor to consider is safety, so properties in areas with low crime rates are the best choices. For example, if you want to invest in a property in Utah, invest in safe cities like Highland and Spanish Fork.
Curb appeal is also a significant factor because tenants will want to live in a nicely painted home with a well-manicured lawn. If you plan on renting to families, check the quality of the schools in the area, as well.
6. Risks of Renting
Having an exit strategy means you can still earn from an investment property despite risks. Research on contingencies, such as:
- Lack of tenants: Figure out how you’ll pay the mortgage if no one is renting the property.
- Buying another investment property: Should you sell or refinance your current property in Utah, so you can buy a house or unit you can rent out?
- Property quality: Would the investment property need repairs and renovations?
- Unexpected costs: Apart from maintenance, factor in emergency costs like repairs for roof damage and burst pipes.
Understanding the risks and knowing how to mitigate them ensures the success of your investment property.
While buying an investment property can be worthwhile, it is no small task. You’re putting a lot of your hard-earned money, credit score, and name into a risky undertaking. Evaluating the expected income, expenses, rewards, and risks that come with the property can help you capitalize on your investment.
