3 Things to Consider Before Buying Property as an Investment

Dated: May 13 2021

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3 Things to Consider Before Buying Property as an Investment

golden piggy bank with stacks of cash

Investing in property can be a huge step toward financial security and freedom. Most people will tell you that investing in property is a smart, long term choice. Today we will examine some major benefits and drawbacks in investing in property and see if it is a wise choice for you. We will also take a look at some of the types of property investment.

  1. Is Investing In Property Right for Me? 

As you probably know, owning real estate is one of the best investments for your money. Investing in real estate comes with many benefits including, the potential for passive income, tax advantages, building your portfolio, and creating equity. However, there are also drawbacks to investing in property such as the initial investment, the time and money required to maintain the property, and the liquidity of the asset. So how do you know if investing in property is the right move for you right now?

Asking the right questions

Financially Ready?

Truthfully, it all comes down to where you are in your life. The first question to ask yourself is if you are financially ready to make a down payment on an investment property. Real estate investment is a great way to make passive income and the property value will only rise over time. However, it does come at the cost of a large initial down payment. Interestingly, this downpayment is larger than if you were purchasing a home for yourself. But don’t worry we will talk about that in another article when we cover getting started. 

Investing More Than Money

Next, do you have the time and energy to spend fixing or maintaining the property? Property ownership is a serious investment not just financially but also with your time. For instance, if you were looking to flip a house it might require large chunks of your time to fix any issues and get it ready for the market. However, if you want to keep the property as a rental you will have a long term commitment to the property and the tenants who live there. This means being on call for any issue with the property like if a pipe were to burst. Of course you could always hire a property manager but that comes with its own set of advantages and drawbacks. 

Prior to investing in property it is important that you seriously consider all the benefits and drawbacks to see if it is the right choice for you. Investing in property requires a large commitment but can be well-worth it if you are prepared for the responsibility. If you do decide that property investment is the right choice then the next step is to decide how you want to do it. Let’s take a look at two of the ways that you can earn income from property investment. 

  1. What Type of Property Should I Invest In?

When people think about investing in property there are generally two ways in which they envision making income: renting the property or flipping it. If you are new to the property investment world you might have questions about what is included in both of these types of investments. Here we will cover some of the basics.

Rental Income

When you purchase a property with the intention of earning rental income that means that you will be renting the property out to tenants. This is one of the most common ways of  earning passive income from your investment. This is a great long term strategy because your property will increase (appreciate) in value over time which will both add to your net worth and increase your cash flow from rental income. 

The Risks

There are some inherent risks in purchasing a property with the intent to rent it out. First and foremost, there is the possibility that you might not rent your property out right away. It is recommended by experts to have a financial cushion just in case this happens. Next, there are the potential issues that could arise from renting the property out. As a landlord you are responsible for maintaining the property. This means you need to have a wide variety of skills in case anything should go wrong. Additionally, you need to have enough knowledge of tenant laws in your region to make sure that you are able to handle any situation that pops up.

How to Be Successful

The best defense is a good offense. Anything can go wrong in property investment but taking the time to do things right at the start can help you to avoid some of the risks we mentioned above. 

Location Location Location

One way to make sure that your property never stays vacant for long is to invest in a good location. A few of the key aspects that you should be looking for are a good school district, low crime rates, access to public transit, and plenty of amenities like parks and malls. It also helps to invest in a place with a growing job market. This will allow for a greater amount of interest from those looking to rent. Finally, a location with low property taxes might not help rent out your property sooner, but it will help to make your property more profitable. A great real estate agent can help with this part.

Plan Ahead

It is important that you have clear expectations for the income that you will make from your property and plan accordingly. For instance, the average return might be 10% for a property that someone has owned and maintained for a while. However, in the first year there might be start-up costs which need to be considered. Interestingly, a 6% return in the first year is considered healthy and is expected to increase over time. Furthermore it is recommended that you budget approximately 1% of your return of the property value for maintenance. You might also want to consider additional hidden costs, such as property taxes, and homeowners’ association fees.  

Flipping a House

Another common practice for property investment is called flipping a house (also known as wholesale real estate investing). This is when you purchase a property, make any necessary updates and improvements then quickly sell the property. Just like purchasing a property for rental income, when you purchase with the intention to flip a house there are some details that you need to consider.

Common Errors

Just like any other business venture, investing in a property to flip requires knowledge, and planning in order to be successful. One of the common traps that first time investors fall into is underestimating. First time property investors will often underestimate the time or money required for a project. This can lead to at least frustration if not worse consequences for the investor. 

Moreover, a novice investor might underestimate the skills and knowledge required to complete a job. Is it better to get the job done by hiring a professional or to try to do it yourself? Simple tasks like cleaning or door knob handle replacement are fairly easy and require less skill and labor than refinishing a floor or repairing a wall. It is important to have an understanding of the limits to your skill base. This will save you a lot of time and frustration in the long run. Overall, patience and good judgement are two crucial aspects to flipping houses. 

  1. Is Financing The Property Realistic and Profitable?

Getting A Loan

 

Getting a mortgage is probably the first thing you thought about when you heard “property financing.” Whether a mortgage makes sense for an investment property mostly comes down to costs and profitability. Is the interest rate low enough so you can make a profit off your property or is the interest rate going to eat up all of your margins? Typically a loan on a property that is not owner occupied is going to be at a higher interest rate. And then what do you do if you aren’t able to qualify for a loan? 

Another avenue to explore is private money lenders. Usually a private money lender will charge a higher rate and the loan will be for a shorter period of time. This may be ideal for a property that you are going to fix and flip. It is something you should carefully consider in your costs. How long are you expecting to have a loan on the property? What will the cost of the financing be? What happens if your project goes for a longer period of time than expected? 

 

Paying With Cash

 

Of course, if you have the cash sitting around in your bank, you may want to consider using it for your investment property; however, most of us don’t necessarily have that amount of cash just lying around. You will want to consider the purchase price, closing costs, and set your budget for renovations.  You also want to consider the opportunity cost of paying with cash. The main benefit is that you won’t pay interest on a loan, but you may be missing out on other investment opportunities. You may want to consider buying multiple properties and use your cash on hand for multiple down payments on several properties. This way you leverage the cash you have.  On the other hand, paying with cash might be better if you want a short term investment where you fix and flip.

 

Paying for Renovations

  It might take some creativity in figuring out how you are going to pay for your renovation. Don’t be afraid to explore all of the options available to you. If you figure your project is going to be complete quickly you may consider putting some of the expenses on a credit card, planning that you will pay off the debt as soon as you sell the property. Look for a lender that is willing to give you added cash for improvements. It may take some time to look at all the options, but it will be well worth it. 

Key Takeaways

Investing in property is a great way to make passive income, increase your net worth, and diversify your portfolio. All you need to do is make sure you are ready for the responsibility and commitment. Do lots of research and come in with a plan on exactly what you are looking to accomplish. Be sure to set realistic goals for those accomplishments. Use your resources (like a great real estate agent) to make sure you are investing in the best possible property. Finally, have patience. Property investment is something that pays off in the long term so relax and enjoy the ride. Check out this article about reasons to invest in real estate if you are curious about learning more.



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Gretchen Wicker

Hello! I'm Gretchen! My love for Colorado began more than 30 years ago as my family moved from Washington State to Colorado Springs where I began attending Air Academy High School. My love continued t....

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