It is no secret that buying a property is one of the smartest ways to create passive income and long-term wealth. Beyond monthly income, property investment carries the promise of tax breaks, equity gains, and a solid hedge against inflation. However, make no mistake, real estate investment comes with risks and challenges, including market fluctuations, liquidity concerns, and maintenance and upkeep costs.
Whether you are buying a vacation rental property, a condo to rent out, or a commercial investment property, it is crucial to do market research and complete proper due diligence before making any investment decision. To help you get started, the investment experts at Brunswick Real Estate have put together the tips you need to consider when buying an investment property.
Consider the location
It is crucial to think about the location of the investment property before making any purchase. The location can significantly impact the property's potential for long-term appreciation, rental income, and overall investment success. A property in a desirable area with strong economic growth, good infrastructure, and access to amenities is more likely to appreciate in value over time. For example, a fixer-upper can be a great choice in a place with high housing competition where you can easily recoup your repair costs.
Determine the condition of the property
Another crucial factor to consider when buying an investment property is the property's condition at the time of purchase. It may be tempting to go for a fixer-upper given the likelihood of getting higher capital gains. However, you need to ensure the renovation costs and repair efforts pay off when it is time to sell the property. The rule of thumb is to avoid a property requiring extensive renovation and over-capitalization, since such properties are likely to result in reduced profits or even a loss.
Research existing regulations
Becoming an investment landlord comes with a lot of responsibility. It is your duty to determine the current codes and regulations regarding rental properties and tenants' rights in your area. In essence, existing regulations determine how the property can be used, the type of business that can operate on the premises, and the property owner's responsibilities. This can significantly impact the property's value, potential income, and overall profitability. Keep in mind these laws change often and vary from one state to another, and falling behind can result in non-compliance, which attracts fines and penalties.
Research property taxes
Property taxes are one of the costs that vary widely from one location to another. In high-end neighborhoods that attract long-term tenants, higher property taxes may be more acceptable as they often come with desirable amenities and services. However, an issue arises when some less appealing locations have unexpectedly high property taxes. For this reason, research the property taxes of the location vis-à-vis the expected revenues before putting ink on paper. A simple visit to the municipality's assessment office can be a great way to access all the tax information on a file. Alternatively, talk to homeowners in the community to determine the current taxes and whether increases are probable in the near future.
A stable job market means a consistent influx of potential tenants, reducing the risk of vacancies and ensuring a steady rental income. In areas with high demand for rentals due to a thriving job market, rental rates tend to be more competitive, allowing you to charge higher rents and potentially increase your rental income. Check with the US Bureau of Labor Statistics
to determine how the specific municipality rates job availability.
Available amenities can significantly impact the property's desirability, income potential, and overall value. Features such as parking spaces and proximity to public transportation, schools, parks, and shopping centers can make the property more appealing to renters. Before settling on any property, visit the neighborhood and check out the parks, restaurants, movie theaters, and public transportation links.
Check future development
Future development projects in the area can lead to increased demand and property values. For instance, the construction of new infrastructure, commercial centers, schools, or transportation hubs can attract more people to the location, driving up property prices over time. Generally, the municipal planning department offers information on future developments and plans that have been zoned in the area of your interest. A location with a lot of ongoing construction is usually a great sign of growth. However, you should watch out for new developments that can negatively impact the prices of the surrounding properties.
Figure out your finances
Although the path to obtaining a rental property loan is similar to that of a primary residence mortgage, there are some subtle differences to be aware of. Since rental property loans have higher default rates, lenders typically charge higher interest rates on them to cover the added risks. Depending on the qualification criteria, you can choose either a traditional mortgage loan, an FHA loan
, or a VA loan
. Regardless of the option you choose, underwriting standards are generally stricter for rental property applicants compared to other loans. Mortgage lenders look at credit score, down payment, debt-to-income ratio, and higher minimum down payment.
How much money can I make on my rentals?
To determine the profit of your rental property, you have to deduct operating expenses from your operating income. Generally, the operating expenses on a new rental property are between 35% and 80% of the gross operating income. With this in mind, many investors use the 50% rule. For example, if the monthly rental income is $3000, expect to pay $1500 in total expenses. One way to reduce your costs is to bundle your landlord insurance with a homeowners insurance policy.
What is the 1% rule for an investment property?
When calculating the expected return on a property, it is a good idea to consider the 1% rule
. The 1% rule is a real estate investment yardstick that investors use to determine whether a particular investment is worth the effort. Under the rule, each month should bring not less than 1% of the buying price, including related costs such as repairs or renovation expenses.
Work with a real estate expert
An investment property can be one of the most fruitful purchases you can ever make. However, finding the right property with guaranteed high returns takes a lot of footwork and research. Once you have found the ideal investment property that matches your preferences, keep your expectations realistic. Even with the promise of quick returns, properties have their own share of challenges that can dampen the spirits of even the most seasoned investors.
If you need expert guidance to find ideal homes for sale in Fruita, Colorado, the Brunswick Team is ready to help. We will help you navigate the process and make the best purchase possible. Contact us today to schedule a consultation.