In this quick guide, buyers who are looking to grow their portfolio and income will learn the ins and outs of investment properties. Discover if an investment property is the right choice, the type of property to secure, and how to apply for a second mortgage. Additionally, this quick guide will weigh the pros and cons of this new venture to help buyers determine the right decision.
What are Investment Properties?
An investment property allows buyers to generate income through the renting or resale of a secondary residence. A popular example of an investment property involves purchasing a duplex, where the owner lives on one side and rents out the other to help offset the mortgage payment. Buyers of investment properties like to renovate the property and quickly resell it for a profit.
Are Investment Properties the Right Choice?
Buyers should consider several factors, such as the affordability, appreciation, and location. Every property should be analyzed from head to toe or buyers could end up with unexpected expenses. Therefore, buyers considering an investment property should have the following secured:
Adequate Financials: Most mortgage lenders require borrowers to have at least a 15% down payment for investment properties. In addition, buyers must complete essential repairs in a timely manner, which can be costly.
Time Management: Investment properties will take up a lot of time so buyers need to be prepared for certain tasks, such as marketing the property, as well as interviewing and running background checks on potential tenants and performing maintenance projects.
Housing Market Trends: Housing market indicators will let buyers know what will and will not sell. Be sure to conduct research and analyze market trends to find the perfect area to invest.
Understanding Landlord Duties: If buyers wish to purchase investment properties with the main goal of renting the property, they must understand landlord duties. This includes finding tenants, undergoing screening tests, creating a lease agreement, and collecting payments on time.
Should Agents Purchase Investment Properties?
Since agents know the market, creating an investment portfolio will enhance their buying and selling techniques, as well as produce the following benefits:
Expert Knowledge: Agents have a detailed understanding of the real estate market. This includes market trends, property types, and the most popular amenities. This knowledge allows agents to determine the most profitable property right away, giving them an advantage over other investors.
Analysis Access: Conducting a real estate analysis lets investors know the current status of the market, the fair price of the property, and its profitability. An investor can take up to 3 months to move forward with a property. Agents have access to the tools and data necessary to conduct their own analysis.
Best Deals: Agents have access to the Multiple Listing Service (MLS) database, keeping them one step ahead of other investors. Since investors do not have access to this database, they hire agents who do. Agents can skip this step and gain priority access to newly listed properties.
Good Financing Options: Financing can be a big issue for investors unfamiliar with the available loan options. Agents are already familiar with mortgage requirements and interest rates in certain locales.
Networking: Agents have professionals on hand to help them throughout the entire transaction. Other investors may need to research to find the right people, which can take time.
Applying for an Investment Property
There are some differences when obtaining a mortgage for an investment property. As previously mentioned, most lenders have a down payment requirement around 15% and a credit score of 620 or above to qualify for an investment property mortgage. Lenders are more cautious with this loan since borrowers may be more likely to default if they run into financial trouble. Loan options that were available to buyers in the past, such as government-backed loan programs offered by the Federal Housing Administration or the Department of Veterans Affairs, aren't an option since those loans are used for primary residences only.
Similarly with a primary residence, buyers should get pre-approved for a mortgage to learn how much they can afford. A pre-approval requires a buyer’s financial information, including a hard credit pull and proof of income and assets.
Pros and Cons of Buying Investment Properties
It is necessary to weigh the pros and cons of buying an investment property to confirm if it’s the right decision. For example, when handling maintenance projects, buyers can either hire someone to take care of the property or handle repairs themselves. Since an additional property is an investment, expect to spend 1% of the property’s value each year on maintenance. Buyers should also be aware of utility costs. Buyers can either include them as part of the rent each month or let the tenant pay for utilities on their own. Here are more pros and cons to buying an investment property:
Recurring income: This is one of the most significant benefits of owning an investment property since buyers have the opportunity to source income from tenants who rent their property.
Tax benefits: Several tax benefits come with owning an investment property, including the ability to take a deduction for depreciation and other expenses associated with owning the property.
Long-term appreciation: Investment properties can increase in value over time, whether the owner is flipping for profit or renting out the property.
Lack of liquidity: Investment properties are another expense that may tie up some assets. Buyers could lose some liquidity in financial emergencies due to this.
Time investment: As previously mentioned, buyers will most likely be responsible for maintenance projects and the time needed to find tenants for a rental property.
Unexpected costs: Any home can incur unexpected costs and buyers need to be prepared for the unexpected.
Like a primary residence, investment properties are a big step and offer buyers a world of opportunities. With the right team, purchasing an additional property can be a stress-free experience. For more tips on how to invest in multiple properties, contact HomeHunt today!