Adding real estate to your investment portfolio can be a great asset… if done correctly. Buying a property to flip or rent out has different mortgage requirements than a primary residence. There are always hidden costs that need to be anticipated as well. If you are interested in taking on an investment property, here are five tips for making it a successful venture.
1. Determine the Right Property Type and Area
Picking the right property is crucial to your success. If you are buying a rental home, you need to decide what type of renters you want to attract. Find out what areas those people tend to live in and how much they can afford on their rent. If you are buying to flip the property, you need a home that requires reasonable repairs or renovations that fit within your budget. It also needs to be in a neighborhood that will warrant the price at which you hope to resell it.
2. Pay Down Your Debts
The mortgage requirements on an investment property are much stricter than for a home you plan to inhabit. Lenders will want you to have a lower-debt-to-income ratio. If you have outstanding student loans, credit card bills, auto loans or any other significant debt, try to pay it down before applying for a mortgage.
3. Save Up a Larger Down Payment
Another tighter standard for investment property loans is down payment size. Because it is often a second mortgage loan for borrowers, the risk to the lender increases. In order to mitigate that risk, lenders require higher down payments. You can expect lenders to ask for anywhere from 15%-25%. And even with higher down payments, you may encounter higher interest rates than on a primary mortgage.
4. Calculate Potential Profits
It is smart to have a rough idea of how much you plan to make on your investment property. If it’s a flip home, you can estimate your profit based on the original sale price of the property, your desired resale price and the amount you anticipate spending on renovations. If you are buying a rental property, you can figure out your monthly profits by subtracting your monthly mortgage and maintenance costs (including fees for property management companies) from the expected monthly rent. Figuring out your profits will help you understand your margins and whether they are high enough.
5. Set Up an Emergency Fund
There are always unexpected costs associated with investment properties. It might be finding out more extensive repairs are needed after starting a renovation, or it might be the AC going out after you get renters moved in. Before you buy, saving up a sizable fund to cover emergencies will help you avoid financial crisis when things go wrong as they always do from time to time.
Buying an investment property will be a much more rewarding experience if you do your research and some preparation before putting down an offer. Keeping these five tips in mind will help make your new investment adventure profitable to your bottom line.
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