What's the ultimate form of income? Passive income! And that typically comes in the form of investments. While there are many options, from stocks to funding start-ups, one of the most reliable investments in terms of return lies in real estate.
When purchasing an investment property, there are generally two intentions: either you plan to rent it or you plan to resell it. Both are great options and have the potential for earning a significant amount. In fact, many first time buyers are choosing an investment property before they buy their first home!
But investment properties aren't without challenges or risks. Here are some things to consider before buying an investment property:
Decide if you are more of a "flip and resell" or landlord-type investor. Flip and resell is attractive because the payout occurs as soon as you sell the property. With renting, however, you have the benefit of building equity, the rent will pay off your loan, and you'll enjoy "passive income" as long as you own the property.
Both options require time and money in addition to what you are paying for the property.
Find out information about comparable investment properties in the area. If you plan on reselling, how is the market in the area? If the property requires upgrades or repairs, will the cost of repairs still allow for a profit considering the price of the comparables?
If you plan on renting it, does the property have curb appeal and is it located in an area where rental properties are in demand? You’ll also want to research property managers unless you plan on managing the property yourself.
Along with doing your research and well before you purchase an investment property, you’ll want to take an honest look at what your expenses and potential profit could be. Being analytical about this part will help prevent making decisions based solely on emotions or “hunches.” Although the profits are certainly exciting, the risk is also high so it’s best not to romanticize investment property ownership.
Unlike primary residences where 0-3% down is possible (depending on the loan program -- call us for more details), investment properties require 20% down. If you’re thinking about buying an apartment complex, then you can see how this can be quite a big investment from the start. Remember that your 20% down does not take into account what you need to make upgrades or repairs. That’s why many investors take on partners. Which brings us to our next point --
Investing in an income property with a partner can go very well and be profitable but it can also go bad if the partnership sours. When partnering with friends or family, be careful not to blur the lines between relationship and real estate partnership. Make sure that all aspects are spelled out in a formal contract and consult legal advice before making decisions that could negatively impact the partnership.
There’s so much more to buying an investment property, more than we can share in this article. If you’re looking into buying a second home or possibly a multi-family home for profit, please contact us for guidance. It’s obligation free and the right place to start your investment opportunity.