By RPM Central Valley
Are you planning on investing in your first income property? If so, you’re not alone.
Investing in an income property is a fantastic idea because it gives you the ability to build wealth while creating a source of cash flow that you can use for your retirement.
Tips for Investing in Income Property
Make Sure it’s for You
Do you know your way around a toolbox? How are you at repairing drywall? Or unclogging a toilet? Sure, you could call somebody to do it for you, but that will eat into your profits. Property owners who have one or two homes often do their own repairs to save money. If you’re not the handy type and you don’t have lots of spare cash, being a landlord may not be right for you. (See also: Becoming a Landlord: More Trouble Than It’s Worth?)
Your first property will consumer lot of your time as you learn the ins and outs of being a landlord. Think of it as another part-time job. Do you have the time?
Pay Down Debt First
Savvy investors might carry debt as part of their investment portfolio, but the average person should avoid debt. If you have student loans, unpaid medical bills or have children who will soon attend college, purchasing a rental property may not be the right move at this time.
Get the Down Payment
Investment properties generally require a larger down payment than owner-occupied properties, so they have more stringent approval requirements. The 3 percent you put down on the home you currently live in isn’t going to work for an investment property. You will need at least 20 percent, given that mortgage insurance isn’t available on rental properties.
Beware of Higher Interest Rates
The cost of borrowing money might be cheap right now, but the interest rate on an investment property will be higher than traditional mortgage interest rates. Remember, you need a mortgage payment that’s low enough so that it won’t eat into your monthly profits too significantly.
Calculate Your Margins
Wall Street firms that buy distressed properties aim for 5 percent to 7 percent returns because they have to pay a staff. Individuals should set a goal of 10 percent. Estimate maintenance costs at 1 percent of the property value annually. Other costs include insurance, possible HOA fees, property taxes and monthly expenses such as pest control and landscaping. (See also: A Quick Guide to Landlord Insurance)
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