5 Signs You're Ready To Buy an Investment Property
At its best, buying an investment property is a huge step towards generating passive income. However, in order to set yourself up for success, it's important to make sure that you're ready to take the leap. Here’s how to know when you’re ready to buy an investment property:
1. You're clear on your investment goals.
Investors should have a clear investment strategy in mind before they get ready to make a purchase because that will determine the type of property they buy. With a "fix-and-flip" strategy, you'd buy a home, renovate it, and sell it quickly for a profit. With a "buy-and-hold" strategy, you'd keep the property in your portfolio long-term and rent it out. With wholesaling, you'd contract with sellers to help them find a buyer for their property.
2. You have a decent amount of savings.
Unfortunately, unlike with a primary residence, there's no such thing as buying an investment property with little-to-no money down. Since government-backed loan programs (like FHA) aren't typically available for investment properties, you need to have some savings in the bank. Lenders look at the amount of liquid assets you'll have leftover after paying your down payment and closing costs for reassurance that you'll still be able to make your mortgage payments, even if something unexpected happens to your regular paycheck. And the requirements are often stricter for investors.
3. You understand how to run the numbers.
At its core, buying an investment property should be a mathematical decision. Before hitting the market, would-be investors should understand what metrics they need to consider, such as these rules of thumb:
Rule of 72: Dividing 72 by a fixed annual rate of return determines how quickly you will recoup your investment.
1% rule: If you can rent your property for 1% of the purchase price, you should be able to make your mortgage payments using rent proceeds.
50% rule: On average, half of a single-family home's gross rental income will be spent on operating expenses, like taxes, insurance, vacancy, turnover, and upkeep costs.
4. You're ready to take on added responsibility.
It's important to remember that the passive income that comes along with buying an investment property also comes along with additional work. Make sure you're ready to take that work on before moving forward with your purchase. If you're prepared and have the time to find qualified tenants, as well as deal with the maintenance that comes with owning the property, then you're ready to purchase it. Even if your goal is to fix and flip a home, you'll still have to balance budgets, oversee contractors, and manage schedules.
5. You've assembled a team of qualified professionals.
As an investor, you need a good and reliable team spanning real estate, lending, maintenance, repair contractors, and cleaning service. Let’s say you’re a landlord and something goes wrong one evening. You want to have a good relationship with good contractors who will prioritize an emergency visit if needed. You'll also want to find a lender and a real estate agent. Be sure to do your research as you begin to put your team together. We are happy to help.