A Guide to Buying Your First Investment Property
Begin Increasing Your Wealth
People often feel that by adding an additional income stream to their net worth by purchasing income-generating properties, they can increase their wealth. Often this is true. However, before investing in such a proposition, there are, as in all business ventures, inherent risks to assess. There is much to learn about a property, whether it be a thriving income-generating property or a vacant lot. Taking the time to assess your specific situation and the extra measures it might require to ensure investment profitability can protect you from a huge loss.
First and foremost, this is a business venture, and emotions have no place in your planning. An investment property is different than buying a home where you plan to live many years of your life, perhaps raising a family. Your goal is to assess the business investment dispassionately and logically negotiate the best possible price to ensure profitability. Price is a huge factor to consider. The less you pay for a valuable property increases the odds you will earn a higher profit.
Select a Target
Understand your target audience. Before buying your first investment property, proper research will help identify if the property’s situation and location will attract the type of client to whom you plan to sell or rent. Client identification helps to define your expectation of return on investment through the market and financial factors. Analytical approaches rather than likes and dislikes will guide you to the best property for purchase. Your decisions need to be guided by economics and not emotions.
Securing a down payment is probably a bigger deal than you may think. Unlike a residential home you may have purchased with perhaps a three percent down payment, your investment property will require at least a twenty percent down payment and perhaps as high as thirty-five percent. The reason rates run this high is that mortgage insurance is not applicable for investment properties. Stringent approval requirements for an investment property also contribute to these larger down payments. Always consider and factor into your financial scenarios any expense requirements for renovations before moving forward with your down payment. Profitability models must be adhered to during every phase of your investment.
Calculating all projected expenses and profits beforehand can save you from a disastrous first foray into an investment property. Run the numbers and then run them again. Begin with the money you already understand you can borrow before your first investment property purchase. Then compare the cost of purchasing and renovating an existing home with the cost of building a new home from scratch. Be mindful of operation and renovation costs, particularly during this inflationary period. Finally, estimate the price listing for your property and cut out the expenses for a rough estimate of the profit you hope to make. You may find you do not hit half of your estimated profit calculation, but you must run these numbers to keep your investment profitability in the safe zone.
Your first foray into an investment property is often best as a low-cost home. Lower to mid-range price brackets tend to be easier on your renovation budget before renting or selling your investment property. Even if you do not realize your expected profit margin, you will not be risking losing too much. The learning curve on investment properties is sizeable and always in flux with market conditions. Modest entry into the market can create smaller successes which you can build upon to increase your property investment portfolio.
Eliminate Debt First
Don’t be a debt enslaved individual. If you carry debt, pay it off before you might need to consider investment loan options. In essence, you should not carry debt into an investment portfolio. Before starting in real estate investment properties, clear all of your debts. Your debt includes medical bills, student loans, car payments, credit card debt, and more. After your debt is clear, you may consider investment loan options. There are many options available, and finding the right fit requires a lot of research. Loan options come with various benefits and are situational dependent. Consider features like which option gives you the ability to split the credit or provides you with the line of credit facility.
If you are not the sole investor, choose your partners most carefully. What may begin as a casual conversation about making some side money can become a very complicated situation requiring partnership agreements in writing. The adage “between good friends, good accounts” can be the difference between earning a nice chunk of money or a disastrous property investment experience.
A qualified real estate attorney can guide you through the specifics of location, known costs, zoning restrictions, ordinances and covenants, utilities, road access, easements, surveying, flooding, and building permits. Your first experience in a real estate investment property tends to set the stage for future success stories. Real estate investment properties can provide passive income, tax advantages, stable cash flow, diversification, and leverage to your long-term investment planning. Meet with a qualified real estate attorney to learn how to enter into investment properties successfully. Contact our Chicago area office at 630-568-6656 to discuss how we can help you with any legal questions you may have.