Thank you to guest author, Katie Conroy, for the following article on First Time Investment Properties. As always if there is anything in the world I can do for you, just give me a call! ~ Carol
Make Your First Investment Property a Financial Success
Purchasing your first investment property is a huge undertaking, so it’s important that you go into it well informed. This kind of purchase is not the same as buying a residence for yourself. Lenders will likely expect a higher down payment, for one thing, and you simply can’t get into this business without having a degree of financial security already. But if you have the capital you need to invest and feel this is the right time for you, here’s what you need to know to make this venture a success.
Make sure you can get a mortgage.
Assuming that you will take out a loan in order to make your purchase, the first step to take is making sure you qualify. There are several different options available to you, depending on your circumstances and the kind of property you intend to acquire. These include home equity loans, FHA multi-unit financing, and conventional loans offered by traditional lenders. You will need to have both a good credit score and a decent debt-to-income ratio to qualify for a loan on an investment property.
Know the housing market.
A good investment purchase is one that appreciates in value over time. That means you need to seek out a neighborhood where property value is projected to increase. Once you have identified the community you hope to invest in, do a comparison of the costs there to see whether you can afford to make a purchase. Make sure to work with a realtor who knows the ins and outs of the location and market you want to put a stake in.
Also, keep an eye on whether properties are moving quickly so you know whether you’ll need to act just as quickly when a desirable property goes up. At present, homes in Arcadia are selling for 21.0% more compared to last year for a median price of $1.3M. On average, homes in Arcadia sell after 36 days on the market compared to 38 days last year.
Make sure you’ll get a good ROI.
An ROI, or return on your investment, is a fairly simple idea: It just means that what you make from rent or resale is more than the total sum of everything you put into acquiring it — not just purchase price but repairs, inspections, and time spent. Do an assessment of what you can expect to earn from rental payments in a year. Then, subtract from that the costs of operation, including property taxes and maintenance. This is your net operating income, and if you divide it by your mortgage plus expenses, you will find your ROI. A lower ROI will still yield a profit if you’re renting to long-term tenants but might be iffy if the property is in an area with a lot of turnover.
Protect your own assets.
The best way to protect yourself, in the case of an accident, natural disaster, or lawsuit, is to have excellent insurance. Landlord insurance is distinct from property insurance and covers more since you have to worry about tenants damaging your property, as well as tenants blaming you for an injury or loss.
In addition to getting a good comprehensive policy, consider treating this investment as a business, and create a limited liability company (LLC). This will give your personal property the added protection in the event of a lawsuit. Hire a reputable formation service like Zenbusiness, Inc to file the paperwork for you, set up a legal alias, and more to save yourself the legwork and hefty legal expenses.
Be prepared to manage your rental.
Being a landlord is not easy. You need to be prepared by knowing the legal ins and outs, as well as have a good contract that will protect your interests and that of your renter. Once your property is rented, you will need to be on-call in case of emergencies and have a plan if maintenance is needed. One way of dealing with this is to hire a property manager if you can afford to fit this into your list of expenses.
Investing in a rental can ultimately be a good source of passive income, if you proceed with care. Just don’t rush it, make sure you are ready, and be particular when selecting a purchase. If you are buying a property in Arcadia, Carol Bush will give you excellent and personal assistance in finding the perfect property. Call 626-226-6535.