How to buy investment property
Buying a home is often considered a good investment. Taking it a step further and owning multiple homes as rental properties may also be a great way to increase your assets and make money.
The process of buying a property for investment or rental purposes
Whether you’re a seasoned investor or just starting out, it’s helpful to understand the steps in the process that you will go through when purchasing a property intended for investment or as a rental property.
- Determine your investment goals: Before diving into the property search, clearly define your investment goals. Decide what type of property you are interested in, the location, and the budget you are comfortable with. Having a clear vision will guide your decision-making and ensure you stay focused on properties that align with your objectives.
- Research the market: Conduct thorough market research to identify desirable locations for investment properties. Look for areas with high rental demand, steady property appreciation, and favorable economic conditions. Check out factors such as job growth, proximity to amenities, and school district ratings. This research will help you refine your target areas.
- Set a budget: Establish a budget that includes not only the purchase price, but also additional expenses such as closing costs, taxes, repairs, maintenance, and property management fees. Calculate the potential return on investment and ensure it aligns with your financial goals. If you plan on operating a rental property, this will help you determine where to set the price of rent for your tenant.
- Secure financing: Determine the best financing option for your investment property. Unless you’re ready to make your purchase in all cash, evaluate different mortgage options. Consider working with a mortgage professional during this step or explore alternative financing methods with private lenders. Get pre-approved for a loan to potentially enhance your negotiating power when you make an offer.
- Engage a real estate agent: Partner with a qualified real estate agent specializing in investment properties. They can guide you through the process, provide market insights, and help you find suitable properties that meet your criteria. Real estate agents have access to listing databases and can represent your interests during negotiations.
- Property selection and due diligence: Once you’ve identified potential properties, conduct a thorough inspection and due diligence. Assess the property’s condition, structural integrity, and potential repair costs. Consider hiring a professional inspector to uncover any hidden issues. Review the property’s rental history, vacancy rates, and potential rental income to evaluate its viability as an investment.
- Make an offer: When you’ve found the right property, work with your real estate agent to submit an offer. Consider market conditions, recent comparable sales, and the property’s condition when determining your offer price. Negotiate with the seller, keeping in mind your budget and potential return on investment.
- Secure the purchase: Once your offer is accepted, work with your real estate agent and legal professionals to move forward with the purchase. Conduct title searches to make sure there aren’t any liens or other issues with the property. Review all contractual obligations and deadlines to complete the purchase smoothly.
- Property management: If you plan to rent out the property, think about hiring a professional property management company. They may handle tenant screening, rent collection, property maintenance, and other crucial tasks on your behalf for a fee — saving you time and effort.
- Ongoing maintenance and monitoring: Regularly assess the property’s condition and budget for ongoing maintenance and repairs. Stay informed about market trends and rental rates to stay on top of maximizing your potential investment returns.
Investing in multiple properties can be a rewarding journey, but it requires careful planning, thorough research, and ongoing commitment to make it work for you. By following these steps and working with professionals along the way, you may be able to navigate the process successfully and build a profitable real estate portfolio.
The benefits and risks involved with buying investment property
Is buying multiple properties a good investment overall? Owning property in addition to your primary residence for the purpose of investing or renting out may offer numerous benefits, but like with any type of investment, it comes with certain risks as well.
- Potential rental income: One of the primary benefits of buying an investment property is the opportunity to generate a steady cash flow by turning it into a rental and leasing to a tenant. With careful property selection and good management, you may be able to enjoy a consistent stream of passive income that supplements your financial goals.
- Property appreciation: Real estate typically has shown a tendency to appreciate in value over time. Owning investment property grants you potential long-term capital appreciation. As demand for housing increases and the housing market strengthens, the value of your investment may grow and provide you with gains when you decide to sell.
- Tax advantages: Investment property ownership may provide you with various tax benefits. You may be able to deduct mortgage interest, property taxes, insurance premiums, maintenance, and repair costs, as well as depreciation expenses. These deductions might reduce your taxable income and result in substantial savings. However, you should consult with a tax advisor to better understand what deductions may apply in your situation before purchasing a property for this reason alone.
- Portfolio diversification: Investing in rental properties provides diversification to your investment portfolio. Real estate typically behaves differently from traditional assets like stocks and bonds, which may help you to mitigate risk. It may act as a hedge against inflation and add stability to your overall investment strategy.
- Vacancy and rental market fluctuations: An essential factor to consider when owning rental property is the risk of vacancies. If you’re unable to secure tenants for an extended period, it may impact your cash flow and potentially increase out-of-pocket expenses. Additionally, rental markets can fluctuate, with supply and demand affecting rental rates and occupancy levels.
- Property management challenges: Owning rental property comes with management responsibilities. You may encounter challenges such as finding reliable tenants, handling maintenance and repairs, and addressing tenant issues or possible legal matters. Property management requires time, effort, and expertise — even when employing a professional management company, you still want to pay close attention to each aspect of your investment to make it’s well-positioned to keep growing.
- Unexpected expenses: Property ownership inevitably includes costs beyond the initial purchase price. Unforeseen repairs, maintenance expenses, and vacancies may impact your profitability. It’s a good idea to set aside a contingency fund to cover unexpected costs so you can sustain your investment during challenging times.
- Market volatility: While real estate generally appreciates over time, the property market can experience fluctuations. Economic downturns or local market changes can impact property values and rental demand. Before you buy, thoroughly research the market and consider your long-term investment goals to mitigate risk associated with potential market volatility.
How to buy multiple properties: Financing options
If you haven’t got enough cash in your savings account to cover the purchase price of a new property, financing will play a crucial role in making your investment goals a reality. There are several options available to fund the purchase of a property, but the best option depends on what will work for your unique situation:
- Traditional mortgage: A traditional or conventional mortgage is a common financing option used by investors. It involves borrowing money from a financial institution such as a bank or mortgage lender to purchase the property. With a traditional mortgage, you make regular monthly payments that consist of both principal and interest over a set term.
- Government-backed loans: Government-backed loan programs such as those offered by the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA) may be suitable options for investors who meet certain requirements. These loans may often have lower down payment requirements, but typically come with more guidance or restrictions on their use when compared to traditional mortgages.
- Home equity loans: If you have accumulated enough equity in your primary residence, you may be able to leverage that equity to finance all or a portion of your investment or rental property purchase. A home equity loan allows you to borrow against the value of your existing property to fund a new purchase. Depending on how much equity you have built up and the loan limits of the lender you select, you may be able to borrow cash for either a down payment on a mortgage for an investment property or potentially enough to cover the entire purchase price.
- Seller financing: In some cases, the property seller may offer financing options to you. With seller financing, the seller acts as a lender, allowing buyers to make payments directly to them. This is an option worth exploring if traditional financing is challenging to obtain or if both parties can agree on favorable terms.
- Partnerships and joint ventures: Another financing option for investment properties is forming partnerships or joint ventures with other investors. By pooling financial resources together, a group of individuals may be able to afford more expensive investment opportunities. However, it’s crucial in this situation to establish clear agreements and legal structures to avoid potential future conflict between everyone involved.
Closing thoughts: How to buy investment property
If this is your first time buying a rental property, it's important to know several things. By conducting due diligence and planning, you may be able to avoid problems down the road.
- Plan for what you will do if you don’t get the property rented right away. In this scenario, you will have to carry the mortgage payment, taxes and insurance.
- When something breaks, you will have to fix it – and perhaps more quickly than you would fix your own property.
- This is not a liquid investment and should not be considered a quick source of cash.
- Research the responsibilities and considerations of being a landlord and become well-acquainted with the area where you are buying.
- Determine the potential return on your investment.
- Decide if you will manage the property yourself or spend the additional money to hire a management company.