Purchasing your first investment property is a huge step for any investor. Here are things to know about buying your first investment property.
Owning an investment property is a great way of earning a passive income and generating wealth, but if you are looking for a first investment property, you may not know where to start.
Buying your first investment property can be daunting. Although there are significant rewards associated with buying property, there are also some major risks too.
Here are the seven things that you need to know about buying your first investment property.
What Type of First Investment Property is Right For Me?
The first question that you should be asking yourself is “which type of investment property is right for me?”
There are two common types of property investment: house flipping and rental property investing.
You could buy a property with the aim of carrying out restoration work and selling it. You profit off of the force appreciation while covering your expenses.
While it can be very lucrative, the flipping property provides short term one-off profits. Seller closing costs also cut into your profits, and these expenses can turn a successful flip into a total flop.
For the purpose of this article, we are going to look at the longer-term “buy-to-let” investment where you buy a home with the sole intention of renting it out to tenants. This type of property investment provides you with a steady passive income and the option to cash-out at a later date.
For a buy-to-let property, you may not need as much upfront capital, and there are fewer risks associated with your investment.
1. Decide Whether Property Investment is Right For You
Before you part with your hard-earned savings and take out a mortgage that could be financially risky, you should consider whether or not property investment is the right path for you.
While investment properties are a great way of developing a long-term passive income, they do require time, effort, and a very specific skill set. If you want to succeed in property investment, then you need to ensure that you have these things to offer.
Consider the following variables before jumping in:
- Investment Capital: Do you have the necessary funds to pay for your down payment, closing costs, and several months mortgage?
- Time: Although rental incomes are passive, being a landlord is an active role.
- Uncertainty: When property rentals work, they’re great; however; there may be times when your property is vacant.
If you’re about to jump headlong into the world of property, stop and think about these things.
There may be times when your home is empty and you have no tenants. When something breaks, you’ll need to pay to have it fixed. Factor maintenance, vacancy rates, and capital expenditures into your investment calculation.
2. You’ll Need Support For Your First Investment Property
When you’re stepping into the world of property investment for the first time, it is essential that you build up a support network quickly. This should be made up of useful professional contacts that you can turn to.
The first place to turn to for support will be the real estate agent that sells you your first investment property.
Following on from this, you will need to find a good real estate attorney, a reliable property insurance provider, and more.
Once you own the property, you may need to carry out some work to it before you can bring tenants in. You’ll need the support of reliable local tradespeople. When you find electricians, plumbers, and builders that are quick, cost-effective, and that do a great job, hold onto their contact details.
Finally, to rent your property out, you might want the support of a letting agent.
A letting agent will be able to help you market your property to find tenants. Once a tenant is in place, they’ll collect rent payments and communicate with the tenants on your behalf.
With the support of the right letting agent, you may never have to personally deal with your tenants.
3. Know What You Want
Before you head off to the real estate agent to look for a property, you should think about what type of property you’re looking for.
Do some research into rental properties in your area. Find out how much you can hope to earn from properties that are within your investment budget.
You’ll want to take a wide cross-section of homes. How does the size, location, and condition of the property help? Are there certain selling points that are popular in the area?
For example, are rental tenants looking for swimming pools or en suite bathrooms? Do you need to think about providing parking for two or more vehicles?
If you have a clear idea of what exactly you are looking for, then it will make it easier to find the right rental property.
4. Get the Right Mortgage
In an ideal world, you will have all of the cash to buy your rental property outright. However, if this is not the case, you should learn as much about mortgages and how you can leverage the right mortgage to your advantage.
Getting a great deal on your mortgage could help you to keep your monthly outgoings as low as possible. This will, in turn, mean that you’ll be able to save some cash for repairs or for future investment.
The right mortgage will mean that you can remove some of the uncertainty associated with your investment.
To find the best mortgage, make sure that you shop around and speak to the right mortgage advisors.
5. Make Sure You Have a Cash Reserve
It will be tempting to spend all of the rental income that your property brings in. After all, it’s your money, why not enjoy it?
There will be times when there are going to be unexpected costs associated with the renting of your property. These might include:
- Periods When the Property is Vacant: When there is no tenant in the home during which time you will still need to cover all of your outgoings
- Critical Repairs: There may times when expensive work needs to be carried out to the property
- Renovation Works: At the end of a tenancy, it may be essential that you carry out renovation works before you can market the rental property again.
Considering all of these factors, it is a good idea if you can build up a year’s worth of expenses before you buy a property to rent out.
This should be enough to cover an entire year’s worth of expenses should the property remain vacant for any reason. This should include mortgage, insurance, letting agents costs, maintenance, and taxes.
If you are unable to do this, but you have a tenant, ensure you save all of your profits until you have that healthy reserve built up.
6. Pay Attention to Depreciation
One of the benefits of investing in property is that over time, you can build up equity in the property as it appreciates.
In addition to this, there are also tax benefits.
By deducting your rental expenses from your rental income, you’ll lower your tax liability. These expenses could include mortgage insurance, maintenance costs, property taxes, property management costs, and any other expenses associated with renting out the property.
Another form of tax deduction comes in the form of depreciation. Instead of taking a tax deduction on the year that you buy or carry out improvements to a property, you can spread this deduction across the life of the property.
To depreciate the property, the IRS has certain requirements. These are:
- That you own the property
- That you own the property for the purpose of making money from it
- That the property has a lifespan which can be determined
- That you will be renting out the property from more than a year
You can start to depreciate your property once it is ready to be rented out. It is recommended that you work with a tax accountant to find out the depreciation value for your property.
7. Understand Your Legal Obligations
As the owner of a rental property, you will have several key legal responsibilities. Whether you deal with your tenants directly, or whether you have a company to manage the tenancy, you are still the landlord.
Make sure that you understand all of the landlord and tenant laws in your local area. This might include your obligations with regards to security deposits, the right to access the property, and eviction rules.
Get Help Finding Your First Investment Property
When looking for your first investment property, you’ll need to have the right real estate agents on your side.
An expert team understands the local housing market and will be able to answer any questions that you may have about your property investment.
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