When you are ready to think about buying an investment property, there are some things you need to seriously consider beforehand. Having the money on-hand does not mean that you are ready for this step. The truth is that the more you know about investing in real estate, the more likely it will be that you can make a profit on your investment. Being in too much of a hurry can mean disaster.
There are several things that you can do on your own to learn more and to be able to invest safely. This includes talking to other investors, reading books, and taking courses. Another thing that you could do is get advice from a successful investor, partner with a group of investors in your area, or go with someone who is experienced. Lowering your risk is always worth the time and effort, but you also do not want to plan and never make the commitment.
1. Understand Your Finances
Before you invest in another house, you should have your own finances in good order. Your debts should be low, and your credit good so that you can get a mortgage at a good interest rate. You also want to fully understand how much you can safely invest, how much you have available for renovation and repairs, and what your cut-off point is – when to bail out if need be. You also want to avoid getting a mortgage that is bigger than you can safely handle.
2. Plan Financial Goals
Before you spend a dime, determine what your financial goals are going to be. You should decide how much profit you want to make from the investment, and how much time you want to give to that investment. Taking this step will enable you to look at investing as a way to reach a financial goal, rather than looking at owning an investment property as being the goal. Being able to make at least a 6% profit is a good goal to start with, and you should be able to increase it over time.
3. Choose to Manage it Yourself or Hire Someone
If you are going to manage it yourself, be sure to understand what it involves. You may need to get up in the night to fix a plumbing problem, a heating problem, or remove branches that damaged the house during a storm. Of course, if you do not live nearby, you will need to have someone who can either be on call or manage it for you. If you do not know how to do this type of maintenance, then you will either need to learn how or hire someone that already knows how to do them well. If you must hire someone else, it will reduce your profits. Making sure that complaints and repairs are handled in a timely and correct manner is another thing that you will need to watch for.
4. Get Loans with Low Interest Rates
Take the time to find a loan with a low interest rate. This will enable you to get a larger profit and keep more of your money – no need to give it to the bank. This will take some looking around, but it will be worth it. The interest rate for an investment property is going to be more than for a loan for a first home. Also, make sure that you can keep closing costs to a minimum.
5. Carefully Investigate the Property
In order to get an accurate picture of an investment property, it demands that you take some time to investigate it thoroughly. You do not want to take the word of the seller alone without getting some facts to either back it up or disprove those statements. Get an appraiser to look it over carefully so that you know exactly what needs to be repaired, and then talk to a contractor in the area to understand what it will cost to get it to a move-in condition. Also, be sure to take time to look at the area so you know if it is deteriorating, staying the same, or being improved.
6. Stay Away from Fixer-Uppers
While you can probably get this type of residence for a low price, you never can be completely sure of how much it will cost to get it to a move-in shape. This means that it may be a larger risk than you realized at first, and it may take a larger investment than you have budgeted for it. Ideally, you want a house that can be moved into quickly so that you can start getting an income to recover your initial investment and make a profit.
7. Avoid a Bidding War
Trying to outbid another investor is not a good idea. It can easily lead to costing more than you want to invest, which also means that you will likely end up getting a much smaller profit – or even a loss. Do not put in a bid until you understand what it will cost to have new tenants move in. You also do not want to let your emotions get in the way over a property because you will cease to make wise decisions about it.