Real estate is usually the surest and best way to become wealthy in America. Its all around us and the need is always there. Those that have learned and are learning this understand that the first investment property is usually residential of some type. Here are the 5 key things to focus when buying an investment property.
Financing (Down payment and interest rates)
Funds to purchase the property is usually the first thing that should be determined and factored in. There are a few different avenues one can take, in purchasing. You can buy your first home as an owner occupant (2-units) and put down up to about 3.5% of the purchase price down. You will usually have to live there for about a year, being its a owner occupant. If you’re looking to buy more than 4 units, you’re likely looking at anywhere from 20%-25% down. Interest rates are higher for non owner occupant loans, so that is something you want to discuss with your loan officer.
Decide if you’re looking to rent or flip the property
Buying and holding versus buying to flip are two separate strategies. Flipping a house will cost you more upfront money to get the home sell-able and ready for the market. Getting your initial investment back on a buy-hold will take a little longer but you’re starting to build equity and a portfolio. Renting the property for income is the smarter route for a beginner until they fully learn the ins and outs of the flipping business.
Understand where you’re buying
Knowing what is selling and renting in the area is vital for whichever route you will go. This is where the Realtor will really be crucial in this process, and provide you with the know how to make an educate decision. These questions are all good places to start:
- Whats the ARV (After Repair Value) on that potential flip?
- Whats the average days on market in the local area?
- Is this multifamily worth the price versus rent?
- What are the taxes on this property?
- What are the rents and lease situations?
Check out recent sales
Homes are priced and sell based off what homes similar have recently sold for. That is what the property will appraise for and in the internet age, its usually public information of what they sold for. Since the goal is to make money, you don’t want to make the mistake of overpaying for the home. This is the second leg of what value the Realtor brings to your investment property search.
Repairs and other costs
Repair costs, upgrade costs, attorney fees, reserves, tax prepayments are all things that you need to understand and account for. If you plan to rent, it’s best to avoid major, expensive repairs. Because renting is a long-term investment plan, you want to minimize your upfront cost.
I hope these things have helped you understand the basics of making a wise investment. Although it is a risk, the possibilities can be tremendous if its done right.