One of the best ways to generate passive income and build wealth is to invest in a property. However, the decision to purchase an investment property is a huge one. It demands considerable financial resources and possibly s fair share of your free time, at least initially. Therefore, it’s critical to determine if you’re ready to buy an investment property. Any miscalculation on your part can lead to devastating financial consequences. That’s the only way to set yourself up for success. With this in mind, this article will give you five signs that you are ready for this massive step.
How to know you are ready to buy an investment property
Buying an investment property and purchasing your home are two entirely different processes. Before you decide to invest in a piece of real estate, you need to ensure you:
- Are financially stable
- Have clear investment coals
- Understand how to run the numbers
- Have the necessary time to manage the property
- Are working with a reliable team of professionals
Are you financially stable?
Before you can invest in a rental property, you must ensure you are financially ready to do so. Have you accumulated enough savings to cover the downpayment? Most mortgage lenders will require a 20% downpayment. Many programs can help you do so even without a downpayment when you purchase your first home. When it comes to investment properties, there are no such programs.
Then, you also need to cover the inspection and the closing costs. Before you can start interviewing potential tenants, you have to get the property ready. So, you will need to pay for the initial repairs and possible upgrades. It would be best to have between 30 and 35% of the purchase price saved.
Another point you need to consider is that you will be the landlord, which means that all the repairs during tenancy fall on your back. Also, you will need to handle the repairs promptly. So, in case of an emergency with the HVAC or plumbing systems, you will need to react immediately and cough up considerable funds. You must make sure that your finances allow for such occurrences.
You should also consider where you live. If you decide that you are ready to buy an investment property, it may not be in the area where you live. There are many areas in California worth investing in, but yours may not be the best option. You may want to move to a new home, closer to good investment opportunities. You may need to buy a new home for yourself and hire long-distance movers. Everything is easier when you have a team to get you there, but it costs. You must consider these options as well.
Do you have clear investment goals?
Before you decide to go and buy a piece of property, you have to create a clear investment strategy. There are many ways to invest in real estate, such as:
- Fix-and-flip – buy a home, renovate, and sell for profit
- Buy-and-hold – buy a property and rent it long term
- Wholesaling – cooperate with sellers to help them find buyers
You need to pick the one that suits your investment goals. Having a strategy in place will help you decide what types of property to look for, which is critical.
Do you know how to run the numbers?
Knowing how to calculate ROI is the basis of investing. Before you even consider purchasing an investment property, you have to know what metrics to take into account, so you can calculate whether your investment will be profitable.
More often than not, single-family homes have a predictable cash flow. So, if this is what you are interested in, you can determine relatively easily if a property is worth investing in or not. For example, here are a few rules to consider:
- Rule of 72 – Divide 72 with a fixed annual rate of return. It will tell you how fast you will recoup your investment.
- 1% rule – You should see if you can rent the property for 1% of the total purchase price. It will allow you to cover your mortgage payments with rent.
- 50% rule – About a half of the rental income of a single-family home will go to operating costs, such as:
- Tenant turnover
- Maintenance costs
- Homeowners association
Therefore, you need to calculate:
- Annual rental income (find average monthly rent for similar properties in the area and multiply by 12)
- Net operating income (annual rent income minus your annual operating expenses)
- ROI (divide net operating income by total mortgage value)
Do you have the time to manage the property?
Becoming a landlord comes with a whole host of responsibilities, so you have to be sure you are ready for them and have the time to deal with them. Here are some of the duties you will need to handle:
- Putting up advertisements for your rental
- Interviewing potential tenants
- Running background checks
- Ensuring your tenants pay their rent regularly
- Performing maintenance on the property
Of course, you can always hire a property manager. However, you have to ensure that their fees are included in your calculations.
Also, even if you go for the fix-and-flip approach, you will have some responsibilities. For example, you will need to calculate the budget and ensure that you are turning a profit. You will also need to oversee the contractors and manage schedules. Once you sell, you will go into the next investment pretty fast.
Do you have a team of reliable professionals around you?
Even the most experienced investors need someone to consult with, so you will also need a team of experts to guide you through the process of obtaining an investment property and ensure you really are ready for that step. Once you buy the property, you will need a few more professionals to keep everything running smoothly. Here are some of them:
- A real estate agent
- Mortgage lender
- Financial advisor
- Maintenance crew
- Repair contractors
- Maid service
- Property manager
All of them cost money, and you need to coordinate with all of them. Are you ready for that? Do you have the time?
If the answer to all of the above questions is yes, you need no more signs you’re ready to buy an investment property. Start looking for the right opportunity and begin building wealth in one of the most reliable ways.
Written by Lisa Roberts
New York City Metropolitan Area
Moving Experts US usmovingexperts.com