Real estate investing can be a great way to generate passive income and build long-term wealth. Compared to other investment options, investment real estate offers many advantages, including the potential for appreciation, the ability to generate rental income, and the potential to hedge against inflation. You get to choose the type of investment property you want to purchase, and you can tailor your investment strategy to fit your specific goals.
However, real estate investing also comes with several risks and considerations that you need to consider before making a purchase. Here are three things to consider before buying an investment property:
Location
When it comes to any real estate, one factor you can’t afford to overlook is location. The location of your investment property will play a big role in its future value and rental potential. Failure to consider your property’s location could result in several problems down the road.
For example, if you purchase an investment property in an up-and-coming neighborhood that is not yet fully developed, you may have to deal with increased crime rates and less-than-ideal living conditions. On the other hand, if you purchase an investment property in a well-established and safe neighborhood, you can expect to pay a higher price for the property, but you’ll also have an easier time finding tenants and managing your property.
It’s important to carefully consider the location of any investment property before making a purchase. You will want to choose a location that is in high demand and has a potential for appreciation. Doing so will help you maximize your return on investment and avoid any potential problems in the future.
Another thing to consider is the type of tenant you would like to attract. For instance, to draw in families as residents, you would want to choose an area that is protective and has excellent schools. Suppose you’re looking to attract young professionals as tenants. You’ll want to be in a more metropolitan area with access to public transportation and nightlife.
Maintenance and Upkeep
No matter the kind of investment real estate you’re after, you’ll need to consider maintenance and upkeep costs. Investment properties require a lot of work to keep them in good condition and generate rental income. Taking property maintenance for granted could lead to costly repairs in the future.
You’ll need to consider the cost of routine maintenance, such as mowing the lawn, painting the exterior, and fixing any leaks or other damage that may occur. You should also set aside money for more significant repairs you will need to tackle from time to time, such as replacing the roof or repairing the foundation.
In addition, if you plan on being a hands-off investor and hiring a property management company to take care of your investment property, you’ll also need to add in the costs. A good property management company will typically charge between 5% and 10% of the monthly rent collected from tenants.
Factor in all the costs of maintaining an investment property before making a purchase. Doing so will help you better understand the true cost of ownership and ensure that you can handle any repairs or upkeep you need to take care of.
Financing Options
One of your first considerations when buying an investment property should be your financing options. There are several different ways to finance an investment property, each with its pros and cons. Two of the most common ways to finance your investment property purchase are the following.
Paying in Cash
If you have enough lump sum of cash stashed in your savings account, you may be able to pay for your investment property outright. Paying in cash means you won’t have to worry about making monthly payments to a lender. This means that all the rental income you generate will go directly into your pocket.
However, one downside of paying in cash is that you may have to invest a large amount of money in your investment property. This could limit your ability to make other investments or take advantage of other opportunities. And if you ever need to sell your investment property, it may take longer to find a buyer who is willing and able to pay in cash.
Getting a Mortgage Loan
Mortgage loans can be a great way to finance an investment property because they usually come with lower interest rates than other types of loans. For one, you can take out a jumbo loan if you want to purchase a high-priced investment property. And if you have good credit, you may be able to snag a lower interest rate on your mortgage loan.
One downside of getting a mortgage loan is that you’ll have to make monthly payments to your lender. This means that your rental income will need to cover the mortgage payment and the cost of taxes and insurance. Additionally, you could lose your investment property to foreclosure if you cannot make your monthly payments.
For instance, a jumbo loan can be a great way to finance an investment property, but you must be careful. You can mitigate the risks by looking for reputable lenders offering the best mortgage loan rates. Find a reliable lender who understands your situation, already has a good reputation in the industry, and can provide you with a loan that best suits your needs.
When you’re ready to start shopping for a mortgage loan, comparing interest rates from multiple lenders is vital. This will help you find the best deal and get the most favorable terms for your loan.
This list shows three things you can’t afford to ignore when buying an investment property. You must consider the property’s location, the cost of maintenance and upkeep, and your financing options. By taking the time to research the crucial aspects of investment real estate, you can find the best property for your needs and get the most out of your investment.
