Comprehensive Guide to Buying and Managing an Investment Property
If you’re looking to take a big step in your investment journey, purchasing a rental property is an excellent way to do it. Not only can it diversify your portfolio and open doors to all kinds of other investment opportunities down the road, but it can also generate passive income each month.
With that said, becoming a real estate investor is not as easy as making some calls and signing a few papers. To be successful and avoid financial pitfalls, you must learn everything you can about the industry and strategize each step of the process.
Fear not — Entrepreneur Funding Experts has compiled all (or at least most) of the steps you’ll need to take as you navigate your way to your first investment property purchase. Check out our comprehensive guide below!
Make Sure It’s Right for You
Not everyone is cut out to buy and manage a rental property. Even if you’re confident you can handle the mortgage and operating costs, you also have to consider dealing with tenants, which will significantly influence your investment.
There are less risky options, such as investing in the stock market or bonds. If you end up with non-paying or destructive tenants, you might not see returns on the property, and if the appreciation value of the neighborhood drops, that can reduce your return.
That said, knowing how to prepare and what type of property to purchase can help you minimize major problems like those. As long as you strategize and make intelligent decisions, you can set yourself up for success.
Figure Out a Ballpark Price
If you determine that buying an investment property is the right move, your first step will be to estimate how much house you can afford. Many different online mortgage calculators can give you an idea of what rates and monthly payments you can get approved for. Once you use a calculator, you’ll be ready to seek pre-approval from a lender.
Seek Mortgage Pre-Approval
Too many homebuyers neglect to get pre-approved for a mortgage before finding the ideal property. This is a problem for two primary reasons: You might think you can afford more house than you actually can, and you’ll be at a disadvantage if there’s a bidding war on the property.
Say, for instance, you find the perfect house that fits within the budget of your estimated home affordability. Your lender may notify you that the house is too expensive. Or, you’ll have to tell the seller you’re waiting for a pre-approval and lose the home to another buyer in the meantime. Don’t lose out on a good opportunity! Seeking pre-approval is essential to preparing for a smooth process.
Determine How to Qualify
So, what can you do to put yourself in the best position to qualify for a good home loan? It’s critical to understand that getting a mortgage for an investment property is different from a primary residence. You’ll probably need to invest 15 – 20% on a down payment. And your credit score needs to be at least 620.
That said, there are similarities between purchasing an investment property and a primary residence. For example, you’ll still be required to provide the lender with two months of bank statements, two years of tax returns, and two years of W-2s. And the lender will need to verify your assets. Moreover, you should probably save up six months of mortgage payments to have some cushion in case you meet an unexpected financial hurdle.
Get a Mortgage
If you have enough cash to purchase your investment property, you might be tempted to bypass a loan. But before you do that, consider that getting a mortgage can still be a smart move because it leaves you with more money to invest in other opportunities.
For instance, if you have $115,000 available for investing, and your first rental property costs $110,000, buying it with cash will mean you only have $5,000 left. Taking out a mortgage and only paying the 20% down payment would leave you investing $23,000 with $92,000 leftover for other investments. Even if you can pay with cash, think about going with a mortgage so all your money isn’t tied up in one place.
Start Your Business
Becoming a real estate investor essentially means you’re starting a business, and it’s crucial to remember that as you enter into your new venture. This means you’ll need to create a business plan and set up a legal structure for your real estate investment business.
Many investors establish an LLC because it comes with limited liability, flexibility, and tax advantages. You can hire an attorney to form your LLC or choose an online service, which is the more cost-effective option.
Once your business is official, consider applying for funding. If you plan to buy and manage several investment properties, you will need a sizable amount of capital to invest. It is understandable to not have this amount of cash on hand, which is where resources like Entrepreneur Funding Experts can help. They can help you to secure the funding you need to make your property investment dreams come true.
Estimate the ROI of the Property
When it’s time to search for your first investment property, you’ll need to target a property that can bring you a healthy ROI. Otherwise, it’s probably not going to be a worthwhile investment.
While there isn’t a foolproof method for predicting how much a specific property will bring, you can use a simple formula to get a pretty good idea. Take the property’s net annual income (amount of rent money after all expenses are taken out) and divide it by the price you paid for the property. For instance, if the annual income is $8,000 and you paid $115,000 for the property, your estimated ROI is about 7%.
Most seasoned investors would think twice before buying a property with a 7% predicted ROI. So, in this case, you might consider looking at other options.
Don’t Settle for a Questionable Property
The last thing you want to do is buy a house that costs too much to fix and requires too much time. You must ensure you’re going to make money. Otherwise, it will be a waste of time and potentially put you in a poor financial position.
Try to avoid a fixer-upper unless it only requires minimal repairs and upgrades and could be rented out at a good rate. For example, adding or repairing an older fence could be a realistic investment in an otherwise solid property. In this case, look up fence contractors in your area and read through their reviews. Be sure to read several reviews from different sites to avoid sponsored or fabricated content. Once you’ve found a few good possible companies, ask them out for written estimates and decide which company is the best fit for your needs. And don’t purchase a property in an area with high vacancy rates. If no one is renting out the home, you’re not making any money!
Research Trending Upgrades
To maintain interest in your rental property, you’ll need to keep up with the trends of what features and designs tenants are looking for. Here are a few projects to consider taking on:
- Painting the walls
- Replacing the exterior and interior doors
- Enhancing the landscaping
- Installing new hard floors
- Providing a washer and dryer
- Updating light fixtures and faucets
- Replacing or refacing the kitchen cabinet doors
- Incorporating smart home technology
Consider Hiring a Property Manager
Finally, there’s a lot to managing an investment property. You have to make sure the property is well-maintained and in good repair, handle tenant issues, collect rent payments, and much more. That’s why so many investors choose to hire a property manager.
Research property management companies in your area and interview several candidates before determining who to hire. That said, if you plan on this being your only property for the foreseeable future, you’re handy with tools, and you’re comfortable with confrontation, you might do well managing your own property (which will save you money too).
You’ve decided that you’re ready to try your hand at real estate investment. To set yourself up for success, keep learning everything you can about what it takes to find, purchase, and manage a rental property. Referencing this guide will get you off to a strong start, but you’ll need to learn a lot along the way. Consider finding a mentor to help you navigate the challenges ahead, and enjoy the journey!
Do you need funding to secure your investment property? Visit Entrepreneur Funding Experts to learn more about how they can help you make your investment dreams a reality.