Property investing can be a great way to generate income and build your wealth over a period of time. However, the thought of property investing can be intimidating. The sums, numbers, expenses is what most people are afraid of. When we use the phrase “property investing,” it is referring to a property that you plan to buy and then rent it out for the purpose of making money out of it. This is a good way to make passive income, however there is a lot more work that goes into it beforehand.
The 7-Step method to buying an investment property
The following steps are constructed to help guide you with the process of property investment and to make it as smooth and productive as possible. All the steps may not apply to you specifically, due to there being many methods of investing in property. However, this is a general overview on how you can go about it. Each step will go through details on what it entails and how you can prepare for it.
Step 1 – Is an investment property right for you?
There are many types of property investing. In this article, we will be specifically talking about the process of buying an investment property. Financing an investment property is not right for everyone. Therefore, It is best to really take the time to do your research and see if it is really for you in the first place. Is buying an investment property the right way for you to get into the world of real estate investing?
Investing in rental properties for example is a great way to get income and long-term appreciation. This is thanks to easy use of leverage therefore investment properties can produce great returns. There are a few things to consider although, before buying an investment property. Time commitment is one of them. If you decide to hire a property manager, it may help you with paperwork load. However, investment properties can still be a time-consuming way to invest in real estate.
Liquidity is another contributing factor why individuals are hesitant about investment properties. This way of property investing is not a liquid investment. It can easily take months to see if you want to receive a fair market value for the rental properties.
You will need a significant amount of money to buy an investment property. According to statistics, you’ll need a minimum of 20% down, closing costs and reserves in the bank. This is important to consider when there is unpredictability involved. Property investing can provide you with great income, however it won’t necessarily mean that it is a steady income.
Step 2 – Build your support system
As a new property investor, surrounding yourself with professionals and experts in the field is very important. For example, you could speak to local property agents that have extensive knowledge when it comes to dealing with investors. The process of hunting for an investment property is different to buying your first home.
You are about to put money in assets that are not directly yours, to gain income from it. It has to be done right, with professional advice. Be sure to assemble a team of experts that knows what they’re doing. Find a good real estate attorney, home inspector, appraiser and insurance agent. These are all vital individuals that can make your process of property investing a much smoother one. Your real estate agent will generally be a source to all these professionals.
Step 3 – Choose what and where you want to buy
It would be wise to define your investment goals before going any further with the property investing process. There are so many different property types, and each requires different methods to maintain and market. A single-family home or a multi-family home? When it comes to property value, you can generally get more cash flow when it comes to multifamily properties. In hot real estate markets, single-family homes tend to have a higher equity appreciation.
Narrow down a price point or budget. You need to have a fixed amount set aside for the property mortgage and the down payments alone. If you’re planning to finance the investment property by yourself, take 20% for the mortgage and 25% for the down payment, as a guide to set your budget. Your lender will expect you to have at least 6 months’ worth of reserves.
The geographical location of the property is very important as well when it comes to investing. You would want to focus in a specific location that you are most comfortable with and are able to be flexible in the area. For example, focus on more trendy neighborhoods in the city however limiting your search to homes that are zoned for schools. This example is specific, and it will help narrow down your choices. Do your research when it comes to location and don’t let it be a factor that you can just get away with.
Step 4 – Secure financing
If you are planning to pay in cash for your investment property, then this section is not for you. This step is to help figure out where you are going to get the money from to put up for investment. When you are buying a house for yourself, it is different from financing an investment property. You have a few different financing options and it is a good idea to have pre approval for the loan that you secure even before you start finding properties to invest in.
There is conventional financing which is the mortgage obtained from a bank. This is backed by any personal qualifications and successes. Several requirements involved to approve this loan include type of property, credit score, employment, assets, and any debts that you may have.
Asset-based loans are the main alternative to conventional financing when it comes to investment properties. The main qualification that must be viewed by the asset-based lender is the asset itself and not the personal qualifications. Asset-based lenders will check your credit score, and use it to determine interest rate and eligibility. However, personal debts, income, and employment is not considered.
Step 5 – Calculate cash flow
Cash flow is important when it comes to property investing. It is especially important for those that are new to the market to understand. For example, if you get a great deal on an investment property, however the cost of ownership is more than the income you are generating from it, it may drain all your money over time. It is crucial to see whether a potential property investment will generate good cash flow from day one.
Step 6 – Select the property you want to buy
Once you have decided what type of property you want, where you want to buy it, how you are going to pay for it, have a team assembled, and know how to calculate cash-flow for rental properties, you can now start looking for the investment property.
Do not make the mistake of looking for properties as if they are your primary home. You are not the homeowner; you are the property investor. It may not be to your tastes, however if it is something rentable, things like number of bedrooms, schools’ districts and access to highways are mainly important.
Step 7 – Want to hire a property manager?
An important decision that you will need to make is whether you want to have a landlord for the property or not. They will take control with managing and maintaining duties for the property. It is up to you to decide whether you want to self-manage or pay for a property management company to do it for you. Hiring a property manager can come at a cost. They typically charge about 10% of what you make from the monthly income. This can have a major cut into your profit margin if there is not a huge number with cash flow.
Property investing can be a great way to build and general income over a period of time. However, with all thing’s investment, there are risks involved. This guide is set up to help you think through the process and take it step by step. There is no need to rush when it comes to property investing.
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