Planning for retirement involves putting money aside towards investments. Numerous forms of investments exist but one of the oldest and some would say safest investments is getting a rental property. You gain from having regular monthly income and having an asset that increases in value. Alternatively, you could find a property that is worn down but could be flipped rather quickly. Regardless of the purpose, here are some tips for buying an investment property.
Mortgage companies look an investment properties as having a higher level of risk. The owner will not be living there so the likelihood of proper upkeep diminishes. In addition, most individuals do not have the resources to pay two mortgages should a renter fail to make payments. Thus, be prepared to pay a higher level of down payment, maybe 15-30%.
Once you own the investment property, managing it can be a second job on its own. Trying to find the right tenant and then addressing maintenance things on a routine basis. This is not to mention following up to ensure timely rent payments. As a result, you may want to consider hiring a property management company. They cost a portion of your monthly rent but they take away a lot of your headaches.
Analyze Rental Rates and Expenses
A big mistake owners make is to assume rental amounts. Take the time to determine what the going rental rates are in the area. Compare this to the anticipated expenses. This will allow you to see whether the investment is worthwhile. If you are getting $3,000 in income but have to pay $5,000 in expenses then this may not be the best way to invest your money. Within this category, you should also plan to set aside funds for an expense account. This would allow for maintenance or sudden expense items to already have money set aside.
Know the Risks
Investment properties are not without risk. If you are trying to flip it, what if the cost of repairs exceeds your estimates or the eventual sale price is too low. What do you do? Could you withstand this loss?
Similarly, what if you get it as a rental property and the unit sits empty for months or they tenant severely damages it. Would you have the resources to remedy it?
In theory, investment properties sound great but the reality is that they come with severe risks and different factors. Understand what you are doing and talk to a mortgage broker should you have questions about financing. Karen Douglas, your Danville Mortgage Genie, is here to provide you insight on any homes in the Bay Area.