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Aug 26

3 (of 6) Important Things You Should Consider Before Buying An Income Property

3 Important Things You Should Consider Before Buying An Income Property

Over the past few years, an increasing number of buyers have become interested in purchasing real estate specifically as a way to help make money. Last year, investment-home sales reached an estimated 1.09 million, a 7% jump over 2014 figures, according to a survey from the National Association of Realtors. Overall, about one in five homes bought in 2015 was an investment property.

Being a landlord can be a lot tougher than it sounds. Investing in real estate can be a risky and headache-inducing endeavor, especially if you aren’t mentally and financially prepared to play landlord and take on multiple mortgages. Below, we’ve lined up six things you need to think about before dipping your toes into real estate investing.

1. Your Financial House Should Be In Order First

First things first: Can your finances handle this type of commitment? In other words, do you have a steady income and a well-stocked emergency fund? Are your high-interest debts paid off? Are you on track to meet your retirement-savings goals? (And no, real estate investing isn’t a replacement for retirement savings, in case you were wondering.) If you have a financial planner, does he or she support a decision to put your hard-earned money into this type of investment? –

After careful consideration of your overall financial picture, you’ll want to map out the costs up front. “Not just any deal is going to make sense—it has to pencil out first,” says Brandon Turner, vice president of growth at the real estate investing social network BiggerPockets.com, and author of “The Book on Rental Property Investing.”

2. Real Estate Isn’t Without Risk, So Calculate Your ROI Before You Buy –

To get an estimate of your first year ROI, subtract the annual principle and interest you’d pay from your total estimated net income from the property (which includes potential rental income, estimated tax savings, projected property appreciation and any estimated additional equity from renovations). Then, divide that number by your down payment, assuming that closing costs and taxes are already rolled into your mortgage, and rehab costs. –

Keep in mind when estimating any potential loan amounts that the rules for investment property financing may not be the same as for primary homes. For example, many of us are familiar with the rule that recommends putting down at least 20% on a home to avoid paying private mortgage insurance (PMI). However, some homeowners still opt to put down less and pay the PMI. But with an investment-property mortgage, you may have a harder time finding a lender willing to consider you if you can’t put down 20%—or more.

In an ideal situation, your tenants would help cover the full amount of your loan and then some, while your property continues to grow in value. However, the key word here is “ideal”—keep reading below to continue weighing the pros and cons.

3. Finding the Right Real Estate Agent Is Key

Many agents may view you simply as potential commission, so it helps to find someone who’ll be on your side: a real estate agent who’s interested in establishing a relationship, owns rental property themselves and specializes in investment properties, suggests Wachob. “Make sure you’re aligned with afiduciary who has your best interests in mind,” he adds.

Finding that person becomes exponentially more important if you’re considering a neighborhood you’re not very familiar with. “[You need] somebody in town who lives and breathes investment real estate with their boots on the ground,” Wachob says. In many cities, safety and desirability can vary not just by ZIP code but from block to block. An experienced agent will be well-versed in the area and will know when a property is too good to be true.

– See more at: http://www.american-apartment-owners-association.org/property-management/real-estate-investing/6-important-things-consider-buying-income-property/#sthash.ABQKF7AH.dpuf

 

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