How to Buy an Investment Property

Daniel Penzing
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Read on to find out if investing in rental properties is right for you.

Real estate property investing is one of the highest yielding and highest risk investment vehicles available. The choice to start trading and investing in property as an asset class is a very important decision as it will lead to either wealth or bankruptcy. Real estate is a tangible asset and allows the investor to live in the property, to maintain the property, and to benefit from the passive income the property generates. Real estate is not a lottery ticket and buying one is not an act of faith. Successful investing in property requires careful planning and evaluation.

Before you start the process of buying and selling real estate you have to ask yourself if you are up to the task. Any property you buy is a sizeable financial investment and ultimately, whether you make a profit in the end will depend on you and you alone. If you are not ready to take on the responsibility of purchasing investment property, you should think about other investment vehicles.

There are many different avenues to choose from when it comes to real estate investing. Each approach will have its own set of risks and rewards but what you choose will depend on your experience, knowledge, and what type of property you would like to invest in.

How to Invest in a Rental Property

An investment property is a great way to make money over time. You will make money as your rent increases, and to offset expenses, you can also deduct your mortgage interest and investment property taxes from your tax bill.

However, purchasing a rental property will take a lot of time and money. So before you get started, here are a few things you should keep in mind.

Get Pre-Approved before You Buy Your First Rental Property

There’s a lot to do before you go out and buy your first rental property, so you’ll want to begin by finding the perfect place. Before you start your search, contact a few local lenders to get pre-approved for a loan.

With your loan pre-approval in hand, you can search for a place to buy. This is important, because it will help you avoid falling in love with a place that you’re not financially prepared to own.

Get the down Payment Right

Next, you need to come up with enough money for the down payment. Reputable lenders don’t allow you to buy any property with less than 20% down. You should plan on saving up at least 20% before looking for a place to buy.

Secure Your Financing

Before you start looking for a property, get your financing in place. If you are uncomfortable handling the purchasing transaction using your own resources, most banks will provide a short term, loan for up to 80% of the purchase price of the apartment. You can use this loan to cover the money that you initially put down on the apartment. This loan will come with a higher interest rate than a conventional mortgage. Instead of paying a bank interest, you will use the rental income from the property to offset the higher interest rate.

Choose What You Want to Buy and Where

This one is a no-brainer, but you have to start with figuring out what it is you want to invest in. If you have only a general idea, that is OK, but find something. The biggest problem most people have with making an investment is that they think they already have more than enough, and then end up spending it on other things, which means they have no security at all. The idea is to find something cheap to begin with, so you won’t go into significant debt.

Put money into things that you already know are worth the money you put into them. This may seem counter-intuitive, but research shows that this is the one way that most people lose the most money. But if you can be patient enough and can wait for the market to settle, there will be an upside in investments, you just have to be smart about it.

By finding a good investment that you are knowledgeable about, you will be able to watch it grow and reap the rewards. There are lots of investments that offer high returns, but you need to know to be careful with your money.

Choose Your Strategy

There are a few different ways you can go about purchasing a rental property for investment purposes. Let’s take a look at them now!

Renting:

Renting out investment properties can be very lucrative, but it does require a substantial financial investment. If you choose to go the renting route, your costs will include the price of the property, additional renovation and repair costs, and any advertising or leasing costs.

Lending:

Another option is to invest through a lending vehicle. This is generally recommended to investors who don’t have the extra capital to purchase and maintain a rental property. Lending is generally offered through banks or institutions and provides you with investors to help ease the burden of purchasing and managing an investment property.

Lease Option:

Investing through the lease option involves renting a property, but you don’t actually own it. This allows you to make money through the rent, but you don’t have to put out the extra capital required to purchase. This choice is wise if you’re a little nervous about your real estate investment skills.

Ownership:

Get Started Without Getting Your Hands Dirty

Investing in property is one of the greatest ways to build wealth over time. There is no better way to make money that to buy and sell houses.But, before you get started, you need to make a plan! What are you going to invest in? Where are you going to buy your investment property?

The answer to these questions will help you to properly proceed and make your dream a reality.

The idea is to get started without having to get your hands dirty. That means that you don’t have to get directly involved in the buying of the property. If you can find a good real estate agent, they will be able to deal directly with the seller and make sure you get the best possible price.

If you do this right, you’ll be able to find a strong house that you can get at a great price, and you’ll be able to earn a substantial income over time.

Your job is to get an investment property that is well-maintained and that’s in a good location. For the location, you want to look for something that is close to the city center or that is in a neighborhood that is in demand. You also want to look for your real estate in a place that has a strong rental history.

Invest in Crowdfunding

Crowdfunding is the latest trend in not only online investing, but also in real estate. Every day there appears a new web-site that offers real estate investing that draws people in by promising to do all the legwork for you. Just sit back, click a few buttons, and watch your money grow without even having to lift a finger.

It sounds too easy, right? That’s because it is.

Most of these companies use a Ponzi scheme business model. A Ponzi scheme is a fraudulent investment operation where the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities or profit of financial trading.

If you’re not familiar with what a Ponzi scheme is, it can sound enticing at first, but the returns are really from your friends and family’s money, or other new investors.

There’s no doubt that real estate investing is a lucrative business. And when done right, it can be the best place to put your money. But you must do proper due diligence before investing with any company.

“House Hack” Your First Rental Property

It doesn’t take much to buy single-family rental houses in most markets.

Do you have a few grand saved?

Make sure this will be covered in a down payment.

These were the first run-down houses I bought with my partner and we rented them out to friends. By the way, we did not do a repair list or rehab. Not the best idea.

Most tenants tear up the houses pretty fast.

Like I say, we were just “house hacking” it. Very low effort and low management kind of investing. Buying and holding single family houses.

People we know have bought multi-unit properties without much money.

It’s an easy way to get “in the game” if you don’t have much money and can find areas where rents are high relative to the value of a property.

The rent covers the costs, and with a single family house you can live in one unit and rent out the others.

This is a low effort, low management kind of investing.

These people also bought multi-unit properties with no money down.

Even if you have a lot of money saved up, consider buying single family houses in normal neighborhoods using very little cash.

Invest in a Turnkey Rental Property

Not everyone can be a real estate mogul and own several rental properties in a plethora of locations. If you’re thinking about how to invest in real estate and produce income and wealth, you should consider purchasing a turnkey property to get your feet wet in property investment. Turnkey properties are real estate investments bought and sold as-is. They are literally ready for you to take over, collect rents from tenants, and net a positive return.

Turnkey properties are investments in real estate that are sold to investors- typically newbies to the real estate game- as a package. A typical turnkey package includes both the real estate and the business operations related to it.

Turnkey packages differ in the way they are carried out and the type of property included, but all generally include everything the investor needs to have a functional and profitable investment. Some turnkey packages may also include financing, but usually that is something the investor has to negotiate on their own.

One of the most important advantages of investing in a turnkey property is that it’s hassle-free and comes with a guarantee. You can rest assured that the investment property you buy is profitable- not a money pit.

Since the property is built and ready to go, and the business operations are also efficient, you can come in and immediately collect rents without having to put a lot of time, effort, and money into the operations.

Buy a Single-Family Home

If you want to get into the investment property game, a single-family home is likely where you should start. There are a few reasons why single-family homes are such a popular choice for real estate investors.

They are an incredible long-term investment because they are often less vulnerable to market downturns. In this way, they are safer than condos or duplexes.

They are also an easy way to get into rental properties. If you learn to screen tenants well, you should have very few issues keeping good tenants in your single-family home.

They are great for both beginners and experienced investors because they are fairly simple and easy to manage.

Of course, there are drawbacks to single-family homes as well. Unfortunately, you probably can’t get your investment property approval until you have a solid financial plan that includes a strategy for paying the mortgage, taxes, home insurance, and repairs on the home. If you have ever been late paying a bill, then you know what a hassle it is if you can’t make your mortgage payments. This is another reason why stick with units in multi-units, where all of the bills are taken care for you.

Research and Analyze

Before you start the process of buying an investment property, you first need to do your research. There are several things you need to know before you start looking. Do you even want to get into the investment property game, or will buying a single family residence suffice? What is it that you are trying to get out of it?

Investment property is a great way to make your money work for you. The purchase price is higher than that of a single family home and can require more upkeep as well as hands-on management but the potential for higher returns is there. It is a common method that savvy investors use to create passive income streams.

One important part of research is to checkout the neighborhood that you are looking at. Not only will you need to look at the property that you are taking a look at, but you will also need to know the neighboring properties.

Spend some time in the area. This will help you understand what potential downsides there are. If the neighbor’s are too noisy, are the properties in disrepair, bad school districts, etc. As you become more familiar with the area, you will be able to understand the logic behind some of the asking prices.

Calculate

Calculate the price of your house by taking an appropriate amount as the construction cost/profit margin and add the estimated cost of land.This will give you the total cost of your house construction.

Always Get an Inspection

Whether you’re buying a single-family home or an investment property, always get an inspection. It’s not just about finding problems in the property, it’s also about finding problems in the neighborhood.

Problems such as increased crime rates, heavy traffic, or industrial pollution can have a serious impact on the value of your property. These are things that might not be immediately apparent but can add years to the length of time it takes to sell your property.

A structural engineer will reveal problems such as rotting frames or termite damage.

An environmental engineer will reveal problems such as heavy noise from traffic.

It’s important to find problems with the property before you purchase it, but it’s also important to find problems with the neighborhood.

Make Sure You're Insured

Although you may hold the property as an investment, you're most likely planning to live in the property. This is important. You need to provide an occupancy clause in the purchase contract to protect yourself from any potential problems. In some cases, this will ensure the warranty of the builder for 12-24 months. If there are any problems, you will need to notify the builder within a reasonable period of time to get them sorted out.

Submit Your Best Offer

As a first time home buyer, there is a common debate on whether or not to submit a cash offer. You may be told that cash offers are the best, and some may even tell you that they are the only kinds of offers to submit.

But is this really the case?

If you know the process of negotiation, you will know that the best offers are the ones you can get him to accept.

While it is true that you may be able to get a much better deal with a cash offer, you just may not able to reach a deal that you’re both willing to accept. So what should you do?

Instead of submitting a cash offer and hoping he’ll accept it, it’s wiser to submit your best offer,.

What’s a “best offer”? It’s one that you can negotiate with the owner to accept. If you know the right way to negotiate and the right price to offer, you can get a great deal even if you’re using an FHA loan or your payment is less than cash buyer’s. So, how do you do it? Of course, you should send an offer to the owner.

Weigh the Risks and Rewards

This 4-part article will give you the information you need to decide if purchasing an investment property is right for you, at the right time, at the right price, and for the right reasons. You will write down the pros and cons, consider your financial capability, and weigh risk and reward. There are many reasons you should check out this guide, but first, you should check out the series table of contents below.

Part 1: When to Buy an Investment Property

Part 2: Why You Should Buy an Investment Property

Part 3: How Much to Invest in Real Estate

Part 4: Where to Invest in Real Estate

This content has been created and written by Michael Milton (a real estate agent, investment and rental property owner for over 20 years) and me, Mike. Our passion in real estate and in providing real estate information, tools and resources is our way of giving back to the real estate community.

Rewards

Of Viewing Investment Real Estate As an Alternative Career:

There are many benefits to treat Real Estate as a career alternative. Let us outline the major three benefits.

The first benefit is the fact that you get to determine what you are doing for a living. Unlike most conventional jobs, you wouldn’t have your path directed by an employer because you are the employer.

For example, you may be working in a job that does not match your dreams or philosophy, but with real estate, the path of progression is in your hands. Therefore, if you want to achieve financial freedom and independence, this is the solution to pursue.

You can control what you do and when you do it.

Secondly, a true professional always gets paid at the end of a job.

Unlike other jobs, you can get paid for your work even before doing the job.

This means that you can get paid for investing in properties.

Lastly, investment real estate often involves less risk and can be more financially rewarding than jobs that require your services by the hour or week.

Risks

Investing, in general, holds more risks than purchasing a home or condo for personal use. However, the rewards can be much higher. That’s why people who invest often are better off financially than people who don’t.

Investing involves risk, but you can reduce your risks by doing your research. Using a REALTOR, finding out how long a property has been on the market, and getting a home inspection can be important factors in determining whether or not a property is a good investment.

An investment property will always require some degree of maintenance and repair, and the level of repairs required can vary widely. Be sure you’re prepared to either have the needed money in your bank account or be able to secure the financing you need to maintain your property.

Tip:

Having a mortgage broker is an excellent way to secure the best financing.

Financing is different for each investor, so discuss financing with your broker!

There are a variety of different mortgages to consider. You should work with a broker who not only has extensive knowledge of the many different financing options, but also can help you to invest the money where it will be most successful. Don’t forget your tax situation when planning your investment property.

A tax professional can help you avoid taking a big hit to your tax plan.

Accurately Calculate the Expenses of Owning a Rental Property

A rent check is coming your way each month in part because you made a good investment. But you also owe a lot of that to your financial management skills and loan repayment practices. You can buy a nice rental property if you manage your money well!

A good investment property has a good combination of a low purchase price, high rents, and high cap rates. However, buying a rent check can be a little trickier than you think. There are several expenses associated with owning a property that you will need to consider. You need to accurately calculate these expenses to figure out if buying is still worthwhile.

^^^

First, you need to figure out how much your gross rent will be. The easiest way to do this is by using a rent roll. A rent roll is a list of all the rents that a potential buyer would have to generate in order to pay back the loan and still earn a profit. You can also use the rent roll to figure out your cap rate. If your cap rate is higher than your required threshold, you have an asset that should generate relatively high returns for you.

Learn to Calculate Cash Flow and ROI

"The Cash Flow Return on Investment (ROI) on an investment property is its cash flow return divided by its price. It's figured by dividing the property's operating income by the property's appraisal value or original cost. If this calculation returns a positive value, the investment property is capable of delivering a positive cash flow.

The term ‘cash flow return’ refers to the rate of return on investment, which equals the property's operating income minus expenses. Net operating income is calculated by deducting property management and operating expenses from the rent the property produces."

"Now that you know your cash flow return and ROI, you can decide whether to go through with the purchase."

The higher the cash flow return and ROI are, the better the deal is for you.

What Makes a Good Investment Property?

Buying an investment property can be a confusing experience. Especially if you’re not familiar with the real estate market, you might not know where to start. It’s important to know, however, that even owning just one investment property can be extremely rewarding.

Buying an investment property as part of your financial portfolio is a way to diversify it and protect the money that you have. You give yourself that little bit of extra flexibility and security when times are tight, and you get the potential for some decent returns on your money over the long term.

So how do you know if you’re buying a good investment property?

Investment properties are great for long-term profitability because they tend to appreciate faster than other investments, particularly stocks and bonds. As you know, you can’t predict the stock market or the economy … but you can usually see a good investment property coming. When shopping for an investment property, look for one that has more positive qualities than negative ones.

How to Buy an Investment Property

Here are some of the things to look for:

Most important, it should be an area that is known for economic growth and appreciation. This will help you predict what your return on investment will be against the fluctuation of the market.