5 Factors to Consider When Buying Investment Property From Own It Home Loans
If you have the time, resources and financial backing, buying investment property can be a great way to gain some extra income in the long-run. You might have your eye on a residential or commercial property that has the potential to be renovated and then sold or rented out, but you shouldn't make a decision to purchase based solely on possibility.
Multiple factors should be considered before buying an investment property to avoid ending up with what Forbes describes as, "a vacant money pit." After all, you are ultimately hoping that others will see the value in your property and spend the money to live their themselves.
Before you fully commit to purchasing, and most likely renovating an additional estate, consider these five factors from Intercontinental Capital Group and home loan provider Own It to understand if you'll realistically be able to receive a return on your investment.
Location is everything
You could find a beautiful property ideal for renting out, but if it's in the middle of nowhere there's little chance you'd be able to find tenants to fill it. Realtor.com recommends thinking about the location first, and the property itself second in context to your vision.
For instance, if you're looking to flip a vacation rental, the property should be centrally located and in a place where people like to visit. This doesn't always mean directly in a tourist destination, but places where there's plenty to do and public transportation is available.
Going the fixer-upper route also has some additional location challenges. In popular cities, it could be more beneficial to invest in a home in need of some TLC because you can easily recoup the costs through higher rent that's the norm in major hubs. On the other hand, a home in the country that is in need of major renovations may not be worth the hassle.
As Forbes explains, there are also community considerations based on your location. If you are investing in a property in an up-and-coming neighborhood, also known as opportunity zones, community members want to be assured you are committed to help reviving the community.
Understand that you cannot just enter a neighborhood without answering some questions about what your investment is going to do for the entire block. This is especially relevant if you are purchasing a commercial building, as residents want to know how it will impact their locale.
Are you prepared for all the expenses that come with a fixer-upper? Chances are, if you've looked into some investment properties you've seen how much structural and practical work they need. Be prepared to shell out the cash to get things fixed and factor in the time it will take before you can sell or rent out the property.
After renovations are complete, as the owner you will still be responsible for maintenance even if you aren't living on the property. For some, this is an added burden and an incentive to sell as soon as possible, but for others the idea of being a landlord is appealing.
If you do choose to rent your property out, you will be incurring the costs of fixing and ensuring the property is livable for your tenants. This can add up, but you also have the option to adjust the rent to compensate for it as long as you give prior notice to residents.
Own It explains the 1% rule
If you choose to rent out your investment property, even just for a short while, keep the 1% rule in mind. This rule is used to determine if the monthly rent earned from your property will exceed that property's monthly mortgage payment. As the landlord, you want to ensure that the rent will be greater than - or at the very least equal to - the mortgage payment so you are breaking even on the property.
Investopedia shows multiplying the purchase price of the property plus any necessary repairs by 1% gives you the base amount that you should be charging for monthly rent. This is important for understanding the risk and potential gain from your investment property if you choose to rent it out.
There are, of course, many other factors to consider, and it can be difficult to determine what the renovation or additional costs would be before purchasing a new property. Do your best to estimate this amount and know what the average rent is for the area to get a better idea of whether or not the property would attract tenants while turning a profit.
Down payment requirements
A major deterrent for investors is the substantial down payment that's required. While this cost will be based on several factors, like your credit score, income and debt-to-income ratio, LendingTree explains it can differ depending on the circumstances.
If you don't plan to live in your investment, you will typically need around 15%-20% of the down payment - and that's only for a single family home. This is already much more than you would pay for a home you would live in, and will only increase depending on the size of the property and can be upwards of 25%.
Living in your investment property can save you some money, as you can make additional revenue from other tenants and put less money down upfront. Weigh all the options and make sure you have a long-term plan for your living situation in relation to your new property.
Own It outlines the risks
Last, but certainly not least, the team at Own It encourages potential buyers consider all the risks that come with purchasing investment property. What if you find a hidden structural issue? Could unsavory tenants ruin your property and leave you strapped for cash? And of course, there's always the risk of the real estate market fluctuating out of your favor and ending up with a negative cash flow.
These are just a few examples given by MashVisor about the risks of investing in real estate. If you want to further understand the risks, investment and potential reward for this kind of stake, don't hesitate to reach out to one of the expert lenders at InterContinental Capital Group today. And if you're ready to commit to a new property, see how easy it is to receive a home loan with Own It.