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Now is the best time to buy an investment property, but this isn’t a decision you should take lightly. You’ll need the right information to make a smart investment.
Read on to learn everything you need to know about buying an investment property.
Should You Buy an Investment Property?
Buying an investment property can be risky, so it may not make sense for everyone. However, it can also be extremely beneficial. So, how do you know if buying an investment property is the right decision for you?
Here are some factors to consider when deciding whether you’re ready to invest in real estate:
- Do you have enough cash flow? Investing in real estate requires cash upfront and throughout the process for unexpected repairs and regular maintenance. You should have enough money saved for a substantial down payment with adequate reserves leftover for incidental costs.
- Do you have a good credit score? Securing a loan for an investment property usually requires a higher credit score than you would need for a primary residence loan. Most conventional lenders will want scores above 620, but your score should be even higher if you want to receive the best rates.
- Do you have the knowledge and skills? Buying an investment property requires basic real estate knowledge to make a safe purchase. You’ll also need to have renovation and management skills, depending on your investment strategy.
What Type of Investment Property Should You Buy?
There are several types of investment properties you can purchase, depending on your budget and goals. For example, you may want to invest in a vacation property, a rental property, or commercial real estate. Each of these rental investments comes with unique variables like ongoing expenses, obligations, and potential ROI. The ROI is the return on investment, meaning the net income owners can make from their property after the calculation of costs like property management fees, property taxes, utilities, and timely repairs.
Many buyers take a single-family investment property approach, as buyers can easily rent single-family homes to couples and families. These homes can be used as their permanent residence or a vacation home that is only used for part of the year.
However, there are also multi-family residential properties to consider, like townhomes, condominiums, and apartment complexes. These can be used as the owner's personal residence, meaning the investment property owners could also function as on-site landlords.
Finally, commercial real estate can be an extremely beneficial investment. You can invest in retail properties, office properties, or industrial properties like warehouses, manufacturing plants, and testing labs.
How to Finance an Investment Property
Financing an investment property differs from financing a primary residence in the types of loans available, the best lenders to consider, and the process of applying and qualifying for a loan. Investment properties may require higher interest rates and larger down payments than primary residences
Different Types of Loans for Investment Properties
While you may be familiar with conventional loans for primary residence purchases, there are also conventional loans for investment properties. These are long-term loans that typically come with stricter requirements and lower interest rates.
If you’re not able to meet these strict requirements, you may want to consider other financing options. One option is a bridge loan. A bridge loan provides you with temporary financing to close on an investment property. After closing, you can seek permanent financing to pay off the bridge loan. Bridge loans have flexible requirements and terms that make them great options for foreign investors.
If you’re willing to pay for fast cash through a higher interest rate, you may want to consider a hard money loan. Hard money loans come with few requirements, but there is a catch. These lenders aren’t concerned about monthly payments because they know they can get their money back by repossessing the property if needed. Still, these loans are considered high-risk for lenders and come with interest rates that can reach 15%.
Finding an Investment Property Lender
Once you have identified the right kind of loan product for your investment property, you can begin finding a lender. You need to decide the type of loan you want before finding a lender because not all lenders offer all types of loans. For instance, a lender that offers a conventional loan for an investment property may not also offer a bridge loan.
When looking for a lender, ask for recommendations from family, friends, or colleagues. If this approach doesn’t create any solid leads, the next best place you can look is the internet. Simply conduct an online search for the type of loan you’re looking for and check out the first few results.
Visit the lenders’ websites and review their products, terms, and requirements. Also, be sure to check out their customer reviews and testimonials. From there, you can narrow your list down to your final contenders.
Qualifying and Applying for an Investment Property Loan
Now that you have your final list of potential investment lenders, it’s time to get pre-approved. You should receive pre-approvals with interest rates from several different lenders so that you can choose the most competitive offer.
Before you get pre-approved, you need to make sure that you qualify for your target loan. Many lenders require a specific credit score, debt-to-income ratio (DTI), and cash reserves or assets to qualify.
For the formal application, be prepared to provide financial documentation, including income tax returns, income statements (W-2s or 1099s), pay stubs, bank account statements, and investment account statements. The lenders will run your credit history to ensure that you’re a reliable and trustworthy borrower.
How to Manage Your Investment Property or Portfolio
After you have financed and purchased your investment property, you have to manage it. There are several methods you can use to manage your investment property or wider portfolio effectively.
1. The BRRRR Method
The “BRRRR Method” involves buying, rehabbing, renting, refinancing, and repeating.
Using this method, buyers purchase run-down properties and improve them through rehab and renovations. They then rent them to qualified tenants at a competitive rate.
When eligible, buyers will refinance the property for a better rate with a lower monthly payment on their investment property mortgage. They then use their profits to purchase other properties to build their portfolio.
2. House Hacking
House hacking requires purchasing a property that buyers can use as their primary residence while simultaneously renting it out. For instance, buyers can do this with a duplex, triplex, or quadruplex home. Buyers can also invest in a single-family home and rent out the basement, in-law suite, or spare bedroom.
This approach allows buyers to live for free, and in many cases, it also makes a profit. This is a great way to start investing in real estate. In the eyes of the IRS, if the property owner lives in the residence for 10 percent of the days the property is rented, the property is considered a second home for tax purposes. This allows buyers to access the primary residence financing that often comes with lower down payments and interest rates.
It's wise to invest in landlord insurance and read up on tenant laws if you choose to have renters in your home.
3. Fix and Flips
Fixing and flipping entails buying a run-down property, renovating it, and selling it for a profit. This approach is similar to the BRRRR method, but buyers simply sell the property instead of keeping the property and renting it out.
Fix and flip is a great hands-off investing approach that helps buyers avoid finding tenants and managing properties.
Wrap Up
If financing is slowing down your investment property journey, reach out to the lending experts at Vaster. We can provide tailored advice about our different loan products, and we offer a wide variety of services, products, and terms to help you make your investment dreams a reality.
Sources:
What to Know About Buying an Investment Property | NerdWallet
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