Buying your first investment home is a major investment, so you definitely want to proceed carefully to ensure your investment is a sound one, and lucrative as well. Do your research and take your time; don’t rush into anything. Besides that, here are our top 5 tips you should consider before buying your first investment home:
Find the right location. Location is key when it comes to looking for an investment home. In most cities of any size, neighborhoods close to downtown or near colleges will offer decently high rental incomes. That being said, if you are targeting families for your rental home, there are different criteria, like a good school district and a yard.Baby boomers, however, will want different things in a rental home. Make sure you keep your target market in mind when shopping for your rental home.
Make sure you have the down payment. While you may be able to put three percent down when buying a home to live in, that is not the case with investment homes. There are stricter approval rules that require you to put more money down. Many times you will need at least 20 percent since mortgage insurance is not available on rental homes. Put enough money down so that you will be cash flow positive.
Know your numbers. As you consider buying your first investment home, it’s important to know what all of your operating expenses will be every month, so that you can calculate your profit margin. Property taxes, landscaping, utilities (if you plan on including any in the rental price), all need to be figured out. Once you determine how much it will cost you to maintain the rental property you can determine what your profit would be and if it’s worth it to proceed.
Buy a home priced below market that needs only minor repairs. First of all, never buy your investment home at retail market value. We recommend only investing in the home if you can get in at 10-20% below its current market value. That way, you start off with equity as either future profit or a cushion should something go awry and you have to sell before your initially planned liquidation date.
And, you don’t want to buy an immense fixer-upper as your first investment home. Whether you would be paying someone to do the work or if you’re handy enough to do it yourself, the time and money will not be worth it. Rather, look for homes that need minor repairs. A fresh coat of paint and some new appliances will cost far less than needing to gut a kitchen or bathroom.
Start small. While you may think buying an expensive investment home will give you a greater profit, the truth is, it won’t. The expenses to maintain it will far outweigh the profits. So, start small if you are just beginning. Some experts advise looking for homes in the $150,000 range to begin (if that’s possible in your market.) This will allow you to learn how to manage an investment property. Once you get some experience, then you can look to branch out to more expensive homes.
When you’re first starting out as an investor, take your time looking for your first home. Rushing into a purchase can result in buyer’s remorse if you haven’t calculated expenses correctly or haven’t done your homework about the neighborhood.