Owning real estate can be lucrative, but like any major investment, it comes with a substantial risk. If you’re thinking of buying your first investment property, it’s crucial to be well-educated. To help you on your path to success, we’ve compiled a list of essential tips for buying real estate.
We’ll begin by explaining exactly what investing in real estate means, along with the potential rewards and risks. Then, we’ll reveal our top eight tips for buying your first investment property. By following these best practices, you’ll be ready to jump into this exciting industry with confidence.
What Is Real Estate Investing?
Real estate investing involves the purchase, ownership, management, rental, and/or sale of property for profit. Many people invest in property to supplement a steady source of income, but others turn their real estate endeavors into a full-time job. Either way, buying real estate can offer many rewards in addition to many risks.
Investing in real estate has numerous benefits, including:
- Real estate value has more stability than the stock market
- Continuous growth of income through rent from tenants
- Continuous growth of income through increases in property value
- Real estate is a physical asset, unlike stocks
- Rental income isn’t subject to Social Security Tax
- Interest paid on investment property loans is tax deductible
Buying real estate can also present various risks, so it’s fundamental to learn the dos and don’ts of the industry. Some risks include:
- High entry and exit costs
- Tenants can be a challenge to handle on your own
- Rental income may not cover your mortgage payment
- If the market declines, you can’t sell the property instantly
- Without tenants, you’ll be responsible for all expenses
- Typically, you can’t just sell a portion of your property
Tips For Buying Real Estate
When you’re investing in real estate, the goal is to minimize risk and maximize reward. This can be a challenge for newcomers to the industry, but learning as much as possible can greatly increase your likelihood of success. Fortunately, we’re here to arm you with eight valuable tips for launching a prosperous real estate career.
Make Sure It’s Right for You
Property maintenance is a fundamental component of owning a rental property. This means making repairs, tackling plumbing and electrical issues, maintaining a clean and presentable home exterior, routine landscaping, and more. If you’re inexperienced with handy work and can’t afford to hire a maintenance team, buying real estate probably isn’t a wise investment for you. However, if you’re well-versed in this work or can afford to hire a professional when necessary, you’re likely qualified.
Pay Off Any Outstanding Debt
When you’re investing in real estate, the point is to increase your income, not increase your debt. Down payments and mortgage bills are costly, so it’s wise to be as close to debt-free as possible before purchasing property. If you have medical bills, substantial credit card debt, student loans, or children attending college, we recommend waiting to buy real estate until after you pay off your debt. This will ensure your ability to afford mortgage payments and other expenses associated with the property.
Steer Clear of Fixer-Uppers
These days, all the popular TV shows about home remodeling projects may have you feeling inspired to tackle a fixer-upper yourself. However, we advise nearly all first-time buyers to avoid these types of homes. Not only are they a ton of work, but home renovations are extremely expensive and cut into your profits. When buying real estate, it’s wise to pick a house that’s in good condition and priced under market value. Essentially, you should aim to get the most bang for your buck.
Allocate Funds Toward a Down Payment
Typically, the down payment for an investment property is significantly higher than that of an owner-occupied property. Mortgage insurance isn’t available for rental properties, which increases the down payment value. Expect the down payment to be 20 percent, and make sure you have the funds to cover that amount. If you’re unable to cover the down payment, you must look for homes with lower list prices, or hold off on buying altogether.
Watch Out for High Interest Rates
Interest rates on investment property mortgages are always higher than interest rates for owner-occupied homes. Interest rates will vary, so make sure to research and compare your options. When buying real estate, you’ll need an affordable mortgage payment that doesn’t destroy your monthly profit.
Calculate Your Margins
Earning a high enough return on your investment is vital. To ensure your financial goals are attainable, you must calculate your margins before making a purchase. There are many expenses associated with owning real estate, including maintenance, insurance, property taxes, homeowner’s association fees (if applicable), landscaping, pest control, and more. After calculating these expenses, make sure you’re left with a wide enough profit margin before moving forward with a purchase. Experts recommend that owners of investment properties aim for a 10 percent return.
Purchase a Low-Cost Home
For your first time buying real estate, avoid purchasing an expensive property. This is because costly homes result in costly ongoing expenses. Prices will vary depending on the market, but experts recommend starting with a home priced around $150,000.
Buy in the Right Location
Whether you’re buying a house for yourself or for others to rent, location is key. Naturally, you’ll be inclined to find real estate in a desirable neighborhood, but you must also keep cost in mind. Ideally, look in areas with low property taxes, low crime rates, decent schools, and a strong job market. It’s also smart to focus on locations with plenty of entertainment and amenities such as restaurants, malls, parks, grocery stores, and movie theaters.
Ready to Buy Your First Property?
Now that you’ve read through our best practices for buying real estate, we hope you’re feeling confident about this exciting new venture. Investment properties are a fantastic way to increase your income and establish a wider portfolio of assets. Buying your first piece of real estate may seem scary at first, but any successful property owner will tell you the reward is worth the risk. If you follow our guidelines and continue learning more about the industry, we’re certain your first real estate investment will be a triumph.