Residential investment properties can be great “bullet-proof” investments if you do your research. Below are three fundamental steps to follow before making a plunge in the property market.
1. Find a mentor and network with other investors
This need not be a scary process. Meeting other investors and experts in the area can help inform your decisions and take the guesswork out of buying a residential investment property.
Find out about local associations in your area, such as local branches of the National Real Estate Investors Association. Join a local group and attend meetings and seminars.
Stay away from “get rich quick seminars”, as you can get the same (or better) advice for free/minimal cost. If someone is charging for a seminar on investing, you have to wonder why they are making money from their seminars, rather than in the market.
2. Make sure your finances are strong
This doesn’t necessarily mean that you have all of the cash required in the bank. You should just make sure that equity in your existing assets such as your home can be leveraged to purchase a suitable property and you have enough cash flow to cover repair costs.
You have to have a strong financial base with buying an investment rental property than you do a property that you want to live in because defaults on investment properties are generally higher. Therefore, the interest rates you are paying are often reflect this and you need a higher down payment.
However, the silver lining is that down payment of 20% or more attract a lower interest rate.
So, altogether, you need to make sure that you can cover that down payment, other purchase costs such as inspections and loan fees which can add up to a sum between three and 8% of the purchase price.
3. Choose your investment property carefully
With owner occupied properties, you make a profit when you sell. With rental investment properties, you are making your money when you purchase.
So you need to choose your area quite carefully. Many first-time investors are afraid to get out of their comfort zone and, instead, purchase a property in an area near their home. This may not be the best choice from a pragmatic investment perspective.
A smart buyer considers the demographics first and often chooses properties outside of their district to get the highest possible return.
By Brandon Fraser