As the real estate market continues its steady recovery, you may be wondering if you should buy an investment property this year. The practicality of purchasing an investment property depends on your personal financial situation as well as market conditions in the area where you plan to purchase. While an investment property can offer steady cash flow, there are a tremendous number of complications that can quickly wipe out your returns. Therefore, careful planning and preparation are essential to ensure that you don’t begin the venture at a deficit. It’s crucial to be aware of all expenses, such as taxes and insurance, in advance and prepare for the cost of repairs and holding costs when the property is vacant. The property location will also affect your return since factors such as crime rate, proximity to schools and amenities influence price and occupancy rates. Below are some personal financial and market conditions to consider when buying an investment property.
1. Interest Rates Are Low
Currently, interest rates remain at all-time lows. When interest rates are low, your mortgage payments will be smaller, and the investment property will be more affordable. This provides several options for achieving a greater return on your investment dollars. You can choose to purchase a more valuable property and charge higher rents. Alternatively, you can buy a less expensive property and keep rents at or below market price to improve occupancy rates. In addition, lower interest rates mean savings. A change of even a fraction of a percentage point can mean the difference of thousands of dollars over the course of the loan.
2. It’s a Buyer’s Market
You will have a larger selection of investment properties to choose from and find lower prices in a buyer’s market. A buyer’s market occurs when the inventory of homes is greater than the number of buyers. It typically leads to lower prices and can position you to negotiate with the seller for an even lower price or other incentives. If you’ve had difficulty qualifying for a conventional loan, you may find a buyer’s market favorable for creative financing options. Sellers who need to sell quickly are more open to partial financing, owner financing or lease option agreements in a buyer’s market.
3. Low Rental Vacancy Rates
It’s imperative that you thoroughly research market conditions as well as the neighborhood prior to purchasing an investment property. One vitally important statistic to note is the vacancy rate. If there are a high number of unoccupied rental properties in the area, you need to understand why. If you’re purchasing in an area near a college or university, the majority of the tenants will be students, and you can expect a high number of vacancies in the summer months. Visit the library or search online for crime statistics. Neighborhoods with a high crime rate usually have a high number of vacancies.
4. Your Credit Is In Good Standing
Your credit score can impact your ability to obtain a loan as well as the ability to profit from an investment property. Most lenders require substantially higher credit scores to qualify for a mortgage on an investment property than for a primary residence. A minimum credit score of 740 is recommended when financing an investment property. If your credit score is lower, the lender will usually charge you a higher interest rate. This will increase your loan payments and make it more difficult to realize a profit from the rental income. You should check your credit score prior to applying for a loan. In the event that it is below 740, you should take measures to improve your credit before purchasing an investment property.
5. You Have a Sufficient Down Payment
A down payment of at least 20 percent is usually required to finance an investment property with a conventional loan. Unlike a mortgage for a primary residence, investment properties are not eligible for mortgage insurance. In addition, the more money you have for a down payment, the lower your payments will be. If you don’t have a down payment, you may qualify for a second mortgage, depending on your credit score. However, these types of loans are not only difficult to obtain but increase the expenditures that must be covered by the rental income to achieve a profit.
6. You Have Reserve Cash for Expenses
Owning an investment property comes with expenses such as repairs, maintenance and holding costs. Tenants may damage the property, requiring repairs to be made before it can be rented again. Over time, the property will undergo normal wear and tear and need maintenance such as flooring, paint and roofing. When the property is vacant, you must still cover the mortgage, insurance and taxes. In addition there are other costs such as lawn care and utilities to ensure the property is maintained while unoccupied. You must have reserves to cover these expenses. It is recommended that you have at least six months of reserve cash for each investment property. If you own more than one investment property, the lender may require that you have reserves for each one. This will prevent you from becoming financially devastated in the event you have multiple vacancies.
7. You Have Free Time
Maintaining an investment property can be time consuming. There may be unexpected repairs and difficult tenants to manage. If you have a demanding career that requires a great deal of your time and family responsibilities, you may want to consider if you are prepared to make the time investment. However, if you are at a stage in life where you have ample time, purchasing an investment property can be a rewarding venture.
2 Point Highlight
The practicality of purchasing an investment property depends on your personal financial situation as well as market conditions in the area where you plan to purchase.
It’s crucial to be aware of all expenses, such as taxes and insurance, in advance and prepare for the cost of repairs and holding costs when the property is vacant.
