The Supreme Guide to Buying Investment Properties

The Supreme Guide to Buying Investment Properties

Introduction

While buying a residential house is a reasonably common occurrence in the United States, buying a property for investment purposes can be a daunting venture. In addition to needing additional capital for purchasing, there are different aspects, such as the different requirements for selection and the types of loans that are available for investment properties, that you need to consider.supreme-investment

What is an Investment Property?

Before starting your search for an investment property, you need to understand what exactly it is. Apartment Rental home, apartment building, condominium, vacation unit, vacant lot, mobile home, store or retail lot – an investment property can take many forms. However, they all have the same principal concept: it is a property that you purchase with the intention of receiving some sort of return on that property, whether it be from an active income, such as rent, or an passive income, such as significant property appreciation for selling later.

Although many investment properties are not primary residences, the owner may occupy a portion of the property, such as when renting out a room in a house or land for agricultural use.

Why Purchase an Investment Property

Although it may seem obvious – the main reason to purchase an investment property is to gain an income, that income can take several forms:

  • Your property will be part of your long-term investment plan: When done wisely, buying an investment property can be an effective strategy for building wealth. However, remember that all markets, including the housing market, will both rise and fall, plus there will be periods of flat-lining and steady growth. To understand if your financial position can tolerate such volatility, consult a financial professional who can determine your ability and readiness to invest in property.
  • Creation of home equity: Again, when selected wisely, an investment property has the potential of building equity that you can use to invest in other investment properties or financial ventures. This strategy can reduce the initial cash outlay needed to purchase those other investments.
  • Realization of income: When you rent out part of all of your property, or if you intend to run a business, then you expect to receive an active, or direct, income from your investment property. That income can be used to re-invest in the property, or else you can use it for other investment purposes or pay down debt.
  • Diversified portfolio: As the saying goes, don’t put all of your eggs in one basket. By purchasing an investment property, you can create a diversified portfolio, helping you to ensure that your financial portfolio can weather changes, no matter in what financial sector they occur.

How to Find an Investment Property

It is easy enough to find a residential property to purchase – but how do you find investment properties to consider? The same strategy for finding investment properties is the same for residential. These include:

  •  MLS listings, filtered for investment properties
  •  Local or regional newspapers
  •  Online classifieds for your area
  •  Word of mouth
  •  Real estate agents and brokers
  •  Banks
  •  Government entity listings such as Freddie Mac and Fannie Mae
  •  Private sellers
  •  Public auctions for foreclosures and estate sales

How do You Know If Your Property is a Good Investment

If you are just starting to enter the world of investment properties, how do you know if what you are looking for is actually a good investment? Simply because the housing market is rising doesn’t mean it will do so forever. On the contrary, what goes up must come up at some point, and nothing goes up in a straight line. With that in mind, what criteria should you use? Consider the following guidelines where applicable:

  • Consider homes in an area that shows a steady growth in population.
  • Investigate the number and type of amenities in the area.
  • Examine the number of current listings and vacancies.
  • Look for above-average rental prices.
  • Pay attention to the infrastructure in the area and avoid properties in under-maintained neighborhoods. Examine the crime rate.
  • Avoid homes in the top 10% of the price range in an area.
  • Consider the condition of the property. Choose a home that doesn’t need major structural repairs or renovations.
  • Look at the amount of property tax you will need to pay; this cost can eat away at your potential income.
  • Always use a real estate agent who knows the area and has sufficient knowledge and expertise to handle investment property purchases.
  • Build a lasting relationship with a good real estate agent who will ultimately be able to help you decide when to sell.

Types of Loans Available for Investment Properties

Chances are you won’t have sufficient capital to purchase an investment property outright – many people don’t. Recognizing that, mortgage lenders have available different types of mortgages for investment properties. These include:

  • Fixed rate mortgage: A fixed rate mortgage means that your interest rate, and therefore your mortgage payments, remain the same throughout a loan term, even if interest rates fall. If you are responsible with your finances and have a budget, then getting a fixed rate mortgage may be the best option.
  • Adjustable rate mortgage: As the name suggests, your interest rate, and therefore the amount of your mortgage payments. An adjustable rate mortgage can be great when interest rates are low or are presumed to fall, but can also be a gamble if they should rise.
  • HomePath Mortgage: For a single-family investment property, this program allows you to put 10% down payment, no appraisal and no mortgage insurance (MI). For 2-4 unit properties, the down payment increases to 20% but you still receive the benefits of no appraisal and no mortgage insurance.
  • FHA 203K: If your investment property will be a multi-family dwelling which will be your primary residence, then you may be eligible for a FHA 203K. It allows you to finance the costs of renovating the property as part of the mortgage. However, before a lender approves the mortgage, your contractor will need to specify the improvements that are needed, the time frame of completion, and payment schedule approved by the lender. This type of loan is useful when you need to leverage the necessary improvements on a fixer upper property.The property MUST be occupied by the owner.

Conclusion

At the beginning, looking to invest in property can seem overwhelming. However, with an investment plan and a reputable mortgage lender, you can soon learn how to purchase and manage an investment property intelligently. Learning how to invest in property is one of the most worthwhile long term wealth building strategies. As with any investment, always perform due diligence, and when in doubt, ask.

Download our FREE House Hunting Checklist! 

Share this:

Comments are closed.