The investment world is gradually moving towards properties and homes. This is majorly attributed to the fact that most people are leaning towards homes during their vacations as opposed to the ‘traditional’ putting up in hotels. Any serious investor right now is dashing to acquire an investment property (one of the most rewarding passive sources of income) in the 21st century.
Below is a guide on the insights and advice for buying an investment property.
When looking for a profitable rental property, you have to consider the geographical position of the property itself. That should be top on your priority list as an investor not only when looking for an investment property but also when generally looking to invest anywhere. No matter how stunning your property is, it will automatically not have much luck if it’s in an inaccessible location.
Prioritise finding a location with access to public transportation, low property taxes, low crime rates, esteemed schools, amenities such as parks, malls, diners, hospitals, and movie theatres. A good neighbourhood with all the above will definitely have a high pull on potential clients. Such a property in a highly competitive market area is more likely to bring returns and help in servicing your mortgage than one in a less competitive market.
Therefore, you’d rather have a sub-standard property in the right location rather than the opposite. You don’t want to be stuck with a rental property when your original aim was to make it profitable.
2. Landlord Obligations
As an aspiring rental owner, you definitely need to be aware of the landlord-tenant laws in the locale of your property.
When it comes to the day-to-day management, your involvement entirely depends on you. Some investors prefer direct involvement with renters in the role of landlords. Sometimes, they also prefer having a personal approach when overseeing daily operations. Another option is to tap a company specialising in managing properties like yours.
Indeed, such services could be deemed as extra cost on the onset. However, it could be beneficial and cost-effective in the long run. Some costs are much cheaper when left to the property management service than working on them personally. Research is the key thing in figuring out what fits you perfectly.
3. Operating Expenses
Operating expenses on your property will most likely be between 35% and 80% of your gross operating income. This may be a bit tricky. Therefore, to ease the calculation of your operating expenses, use the 50% rule.
For example, if the rent you charge is AUD$8,200 per month, expect to pay AUD$4,100 in total expenses. Getting professionals to work out your property management fees may come in handy. This will make work much easier for you as a property owner.
4. High Interest Rates
When it comes to financing your property, you require a low mortgage payment that will only eat a bit into your monthly profits from the property and not one that will leave you bankrupt in the end. One con of getting a mortgage for your investment property is that there are very strict requirements for mortgage approval. In turn, it requires a substantial down payment.
Unfortunately, when using borrowed funds for purchasing properties earmarked for investment, expect higher rates than that of a traditional mortgage. In the instance that you’re buying an investment property, expect at least a 14% to 20% payment, unlike when purchasing a typical family home where the down payment is 1% to 10%. This reinforces the contrast between the requirements for down payment amounts of property earmarked for investment purposes and typical residential purposes.
In addition, the factors that will determine how much will be expected for your down payment include your credit score, income, and debt-to-income (DTI) ratio. It is advised that when going out in search of a property, you should have all the details of your financing to make it easier to know what’s viable for you and what’s not.
5. Risks And Winnings
As an investor, carefully outline and weigh the risks and the rewards. Then, determine whether the pay-out is worth the prospective.
Some noteworthy risks to keep in mind are:
- You could earn a totally different interest than initially anticipated;
- You could have bad or careless tenants, resulting in unplanned costs;
- Expensive repairs could pop up any time;
- Sudden surge or fluctuations of taxes; and
- Economic movements that could affect the local market.
This isn’t to mean that you should mind only these risks. If everyone did this, there would be no investment properties today. Note, however, that there’s no clear guarantee in any investment. Be flexible and anticipate such changes.
The insights given above will go a long way in helping you decide on whether or not you will purchase an investment property. If you decide to purchase one, may it aid you in maximising your returns.