Whether you go on to build a portfolio of profitable assets, struggle with a few non-performing investments, or abandon property investing altogether is decided in those first steps. Those early decisions form the basis for your future success.
Mistakes made with a first investment property are hard to remedy. Their impact goes on for years and may act as a weight on the profitability of later investments. These mistakes can even set a ceiling on future performance or non-performance of your assets.
For these reasons, Blanket Homes Company says getting it right the first time is vital. You’d like to know the common issues derailing new property investors’ dreams. You also want to understand how successful investors have surmounted those difficulties.
To set you on the right track as you work toward that first investment, here is a primer on things you need to know and do to lay the proper foundation for your future as a successful property investor.
Before you buy your first investment property
1. Determine if you have what it takes to be a landlord
Finding and funding a promising investment property is tough. But compared to managing the property, these are the more straightforward aspects of real estate investing. Overseeing the day-to-day operations of an investment property requires you to be an expert in many things. It also demands vast investments of time. Do you want to be a landlord or hire a property manager for the investment?
The real estate investment landscape is diverse. There are several types of investment properties with differences in their financing requirements, types of tenants, operational needs, and regulatory framework. A few more common ones are single-family homes, multifamily buildings, vacation rentals, office buildings, retail centers, self-storage facilities, industrial properties, and mixed-use spaces. Before focusing on a property type, please determine how much work and money it takes to run.
3. Understand available mortgage options
Getting approved for an investment property loan is a significant obstacle for new investors. The standard financing option used by most investors is a conventional loan. Although this is the most affordable option, it comes with many conditions. Other financing options are hard money, private, and home equity loans. Along with learning the pros and cons of these financing options, you want to know the difference between fixed-rate and adjustable-rate interest payments.
4. Know the requirements for financing an investment property
To get approved for a conventional loan, lenders impose the following conditions. It would be best if you had a minimum credit score of 620. You will get better rates if your score is over 740. You must provide 15% – 25% of the property value as a down payment. Your debt-to-income ratio should be within the acceptable range. It would be best to have sufficient cash reserves for mortgage closing costs and emergencies. You must show proof of steady and substantial personal income.
5. Understand the importance of location when buying a property
The location of a property is more important than the property itself. Before you buy an investment property, understand the parameters for measuring the attractiveness of an investment location. Some location characteristics to look out for are school districts: a large population of potential renters, access to public transportation and highways, low-crime rates, recreation centers, employment opportunities, shopping centers, and future infrastructural, business, and residential developments.
6. Evaluate the potential of the investment property
Even before you buy an investment property, it is possible to estimate future profits. To do this, these are some of the factors you have to consider. Look at comparable properties: This is based on the performance of similar properties in the area. Calculate the expected net operating income for the asset. Perform a risk analysis to understand the factors that can threaten your projected ROI.
Real estate investing is fraught with complex and unexpected challenges. Problems with regulations, lawsuits, taxes, tenant screening, marketing, vacancies, evictions, and maintenance are standard. The impact of these issues on your investment depends on the quality of the people you surround yourself with. Successful real estate investing requires a good team. The money you invest in having experienced people around you cannot compare to the trouble they can save you.
As stated earlier, this post is just a primer on the steps you should take when buying your first investment property. It does not go in-depth into these topics.