35 percent of Americans say real estate is their preferred long-term investment. The truth is real estate has the potential to create wealth for you if you do things right.
When buying an an investment property, the goal is to put your money to work today so that it generates more money for you in the future. To the beginner, this sounds simple. You buy property, avoid bankruptcy, and generate income from the property so you can purchase even more properties.
But there’s a huge difference between simple and easy. One mistake in property investment can have consequences ranging from tiny inconveniences to substantial disasters.
To help you start and grow your property investment venture, we’ve prepared a comprehensive guide on how to invest in property.
- 1 What Is an Investment Property?
- 2 What Types of Investment Properties Are There?
- 3 Why Should You Choose Investment Property?
- 4 Here’s What You Should Look for When Buying Investment Property
- 4.1 1. Clear Financial Goals
- 4.2 2. Financing
- 4.3 3. A Suitable Investment Strategy
- 4.4 4. Urban Vs. Rural Property
- 4.5 5. An Appropriate Neighborhood
- 4.6 6. A Suitable Investment Realtor
- 4.7 7. The Ability to Lose Money
- 4.8 8. An Exit Strategy
- 5 Stay on Top of Property Investing
What Is an Investment Property?
An investment property refers to a real estate property that you purchase with the aim of earning a return on investment (ROI). This ROI may be through rental income generated from the property, the future resale of the real estate property, or both.
An investment property may be owned by an individual investor or a group of investors. Sometimes, the property is owned by a corporation.
Depending on your investment strategy, an investment property may be a short-term endeavor or a long-term investment. Short-term investing often entails property flipping, where you buy real estate, remodel or renovate it, and sell it at a profit.
What Types of Investment Properties Are There?
Before buying property for investment, it helps to know what choices you have. Generally, investors have the following options when venturing into property investing:
Residential Rental Property
Rental homes are among the most popular income-generating avenues for investors. You buy residential properties and rent them out to tenants and collect monthly rent. Residential property includes apartments, condominiums, single-family houses, and townhomes.
Residential rental property isn’t the only income-generating investment property. Many investors opt for investment properties that are designed specifically for business use.
The maintenance and upgrades of commercial property tend to be higher compared to that of residential property. However, these costs are offset by higher returns as the leases of these properties tend to command higher rents.
Mixed-Use Investment Property
Mixed-use investment properties are suitable for both residential and commercial use. For example, a building’s main floor may be designed as a retail storefront, restaurant, or bar, while the upper floors of the structure house residential units.
Why Should You Choose Investment Property?
Of all the great investment opportunities in 2021, why should you opt for putting your money in an investment property? Here are a few reasons:
Guaranteed Cash Flow
Cash flow refers to the net income you’ll get from your property after making mortgage payments and operating expenses. Property investment has the ability to generate steady cash flow. This cash flow only gets stronger over time.
You Enjoy Tax Breaks and Deductions
As a real estate investor, you get to enjoy endless tax breaks, and deductions that can help you save money come tax time. Generally, you can take advantage of deductions for the reasonable expenses of owning, managing, and operating a property.
Real Estate Appreciates Over Time
One of the best things about investment property is that its value is almost always guaranteed to increase over time. Thus, you don’t just make money through rental income but also enjoy a profit when the time comes to sell the property. Besides, rent also tends to increase over time, which means higher cash flow for you.
You Get to Build Equity
As you continue to pay down your property mortgage, you’re building equity on the property. That gives you more leverage to purchase more real estate and boost your cash flow further.
You Get to Diversify Your Portfolio
For people who already have investments in other sectors, adding investment properties to the list is a great way to diversify their portfolio. In most cases, real estate has a low or negative correlation with other asset classes. By purchasing an investment property, you’re thus lowering your portfolio volatility and enhancing a greater return per unit of risk.
Here’s What You Should Look for When Buying Investment Property
If turnkey real estate investing seems like the ideal way to create wealth for you, there are a few guidelines to help make your investment as rewarding and successful as possible. Before putting money into any investment property, ensure you have the following nine things.
1. Clear Financial Goals
The biggest mistake you can make when buying an investment property is to begin without knowing exactly what you intend to achieve financially. Everyone has a general goal of earning sufficient money to become financially free or build wealth. But many people don’t know what that means quantitatively.
You need to have a clear monetary goal of the amount of passive income you’d need to generate to quit your day job and still live comfortably as your investments grow. Set aside time to write out your financial goal without making anything too complicated.
Unless you intend to pay for the investment property from your savings, you’ll need to find a lender to finance the purchase. Find out what banks are willing to lend you or whether they’ll lend to you at all.
If you already have a job and a healthy credit score, you should have no trouble finding a lending institution to partner with. But you need to find out the actual amount of money they can lend you before starting to hunt for investment properties. Talk to a mortgage broker to understand your options.
Speaking of mortgages, determine the amount of downpayment you need to save to qualify for the loan you need. Thankfully, many lenders allow you to put down as little as five percent as a down payment today.
3. A Suitable Investment Strategy
There are numerous ways you can invest. The important thing is to look at a strategy that works best for you.
You can opt for a single let property, where you invest in a property that you let out to a single tenant. The property may be a house or an apartment.
Another approach is known as a house in multiple occupation (HMO), where you have a property with multiple units that you let out to individual tenants. You can also consider the buy-to-sell strategy, also referred to as flipping.
All of these approaches are profitable, provided you do things right.
4. Urban Vs. Rural Property
Many investors prefer investing in urban areas because of the relatively stronger demand for housing and commercial space there. But investing in rural areas does have its benefits too. For instance, investment property in rural areas typically costs much less than in cities.
Consider which area appeals to your most, as well as how much capital you can comfortably spend to invest.
5. An Appropriate Neighborhood
It’s not enough to say that you want to buy property in an urban or a rural area. You need to get more specific and research which neighborhoods are ideal to buy an investment property in. You’ve probably already heard that when it comes to real estate, location is the most important factor.
So, what exactly constitutes an ideal location for an investment property? Consider the following factors:
Sure, not all prospective tenants care about the quality of schools in the neighborhood. However, a good rule of the thumb is to prioritize school quality if you’re investing in single-family homes or rental houses with at least two bedrooms each. The fact is American families love living in highly rated school districts and will have no problem paying more if the house is located there.
Job Growth and Employment Rates
Avoid buying an investment property in a declining neighborhood. Rising unemployment rates are a negative catalyst for the real estate market in an area.
Generally, you want to buy property in a neighborhood where people are moving in, not leaving. Look for areas with an increasing demand for housing or commercial space.
Different locations attract different insurance costs. Purchasing an investment property in a flood zone, for instance, may require buying flood insurance, and that doesn’t come cheap. Ideally, you want to avoid such neighborhoods as you start your investment journey.
Buying an investment property in an area where amenities are easily accessible is a huge plus. Simply put, no tenant wants a home in the middle of nowhere, regardless of how nice the house is. If they have to walk 20 minutes to reach a grocery store or grab a cup of coffee, chances are they’ll look for another property.
Just as homebuyers prioritize security when choosing which neighborhood to buy a home in, renters want to feel safe when moving into a house. Take the time to examine the local crime statistics before deciding on an investment property.
6. A Suitable Investment Realtor
One of the best assets you can have when starting a property investment career is a realtor who understands the industry. This realtor can help you pinpoint the best properties in the ideal neighborhoods, saving you considerable time and effort.
But how can you find such a realtor? References from other people in the industry are always helpful. You can also search for prospective realtors online and interview them to gauge their suitability.
Generally, you want to look at things like:
Realtors who’ve been in the industry for a considerable amount of time are likely to have more knowledge of investment properties than newbies. Enquire about your prospective relator’s success record so you can verify their effectiveness.
Knowledge of the Local Area
A realtor who understands the local area will also have a better grasp of the value of investment properties available. Remember, you’re taking a risk at becoming a first-time landlord, so you need all the guidance you can get not to put your money somewhere it will not return.
The best investment realtor will have a wide network of connections in the community. The benefit of these connections is that they may be able to get you opportunities before properties hit the marketplace.
They’ll also have well-established relationships with other professionals you may need in your journey as a property investor, including conveyancers, home inspectors, financiers, and so on.
7. The Ability to Lose Money
Even with the best-laid plans, the unexpected can happen. Few real estate investors can say they’ve never lost money in certain properties.
That’s why you need to sit down and examine whether you can afford to lose money in case some of the investment properties you put money in become duds. If you realistically can’t afford the risk, then you need to ask yourself if you should be investing at all in the first place. The last thing you want is to go bankrupt or lose your home if things go south.
Take the time to consider the worst-case scenario. Determine how you would handle such a situation if it happened.
8. An Exit Strategy
Unless you intend to own a property for the rest of your life, it’s prudent to craft an exit strategy at the beginning. The idea is to be able to get out of an investment property while it’s still generating a profit and invest elsewhere. Ideally, you need to have this strategy even before you buy the property.
Stay on Top of Property Investing
Buying investment property is a sure way to generate income for a long time. However, you need to do everything right to thrive in this lucrative venture. Any wrong move could leave you counting massive losses.
The guidelines we’ve shared in this post can help you start off on the right foot. You could be on your way to making 6% ROI in your first year.
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