Your Complete Guide to Buying Investment Property

The real estate sales and brokerage market size in the US has amounted to $202.6 billion in 2022. These numbers clearly show that many US citizens have ventured into real estate.

Buying investment property is one of the best ways to protect your financial future. It can provide long-term passive income whether you are purchasing commercial property, investing in residential rentals, or flipping run-down houses.

Not all properties, however, are made equal. Some require a significant amount of effort to prepare for rent or resale. Some provide a significant return on investment, but others don’t.

The important thing is to take your time and learn how to get the perfect property for your needs.

Continue reading our top investment property buying tips according to your budget, goals, and location.

Evaluate the Pros and Cons of Investing in Real Estate

Before venturing into real estate, you must do your research well. Understand the amount of work required to maintain an investment property. Know also how much to spend on maintenance.

Typically, maintenance costs may amount to 1% of your property’s value. But if you buy an old property, your maintenance costs will likely be higher. Consider also if you can take on the responsibilities of property ownership.

Do you plan on collecting rent yourself? Can you manage property taxes and insurance? Considering all these factors ensures that your property ownership experience is not stressful.

Below are some advantages of real estate investments:

  • Rental properties provide a consistent income
  • You can use the income from investment property to pay for ownership costs
  • When real estate value increases, you can sell your property at top dollar

Note that there are some downsides to property investment. These include:

  • You may make losses in property sales
  • Selling real estate property takes time
  • Property management can be tasking
  • Mortgages for investment property have higher interest rates

Decide the Property You Want to Buy

The choice of which property to invest in depends on your income expectations. But no matter your investment property, prioritize getting a good cash flow. Here are some investment property options to consider:

Home Flipping

Flipping homes entails buying run-down properties and renovating them to sell them at top dollar. Home flipping carries a significant amount of risk.

You may buy a property with structural issues that cost more to repair than the house is worth. It is best to work with a property expert to minimize the risk of buying a low-value property.

Apply the 70% rule when flipping homes. Under the 70% rule, you ensure the amount of money you invest in a property you want to flip is less than 70% of its value after repairs. Ensure you only do necessary repairs to a property for flipping.

Vacation Homes

Vacation homes are a good investment option if you travel a lot. You earn rental income, and when you travel, you get a place to stay free of charge.

Vacation homes require a lot of maintenance to appeal to vacationers. So you may have to hire someone to help with property maintenance. If the property is far from your home, you need a trusted person to collect rent.

Single and Multifamily Homes

You can rent out single and multifamily homes full-time if you want consistent rental income. These properties require a significant investment.

So, you may need to take out a mortgage. Maintenance costs for single and multifamily homes are also quite high. You can also take out a rental loan to finance single and multifamily homes.

Real Estate Investment Trusts (REITs)

Are you unable to afford the huge initial investment required in the real estate market? Then REITs are a great option to get in on the real estate action. Under REITs, you get to own an investment property without excessive cost implications.

REITs buy properties and include them in their portfolios. They then give people a chance to invest in their portfolios.

You can invest as little as $1,000 in REITs. But the return is not as high as that earned by someone who directly owns an investment property.

The Buy, Rehab, Rent, Refinance, Repeat (BRRRR) Approach

The BRRRR approach entails buying run-down properties, fixing them, and then renting them out to tenants.

After fixing a property, you refinance it to get funds for your next investment. This method can get complicated because it is a mix of house flipping and renting property.

However, if you are skilled in BRRRR, you can amass a large rental property portfolio. You continue to refinance each property you rehab and rent to get funding for the next property.

You stand to gain a lot of profit through the BRRRR real estate investment approach. But because of the high-risk nature of this approach, it is best to have guidance from an expert.

Consider Location When Buying Investment Property

The location of an investment property contributes to how fast you get a customer. The local demographic determine which property sells well in a location. So it is best to work with a local real estate agent when buying a property.

Research your target market and choose a property located in areas they would like. For a vacation home, it is important to understand the property laws in different areas. Some destination areas require owners to pay innkeeper taxes for vacation homes.

Your location also determines the type of insurance coverage that is necessary for a property. For instance, if your property is in a flood-prone area, you need flood insurance.

The best location for an investment property is one that yields the most cash flow. If properties in an area offer a low cash flow, but their value is set to increase, they are still a worthy investment.

In most cases, you have to choose between property value appreciation and cash flow when deciding on a location.

Consider Your Financing Options

You do not have to be rich to buy investment properties. Explore the following options for financing an investment property if you want to invest in real estate:

Get a Mortgage

Mortgages have a 15% downpayment requirement for single-family units and 25% for multifamily properties. You only qualify for an investment property loan if you have a minimum credit score of 640.

The lower your credit score is, the higher your loan interest may be. A bigger downpayment also equates to lower interest on the loan.

If you want a mortgage, it is best to secure it before you start searching for the property. Getting preapproved for a mortgage before the property search ensures you do not have to wait to pay for a property you like. It is also easier to search for a property knowing what you can afford to pay.

Even when you have the cash to buy a property, a mortgage is a good financing source for investment. Investment properties take time to yield substantial cash flow.

As you wait, it is best not to have all your cash tied to one property while you could be making other investments.

Leverage Your Home Equity

If you already have a mortgage on your family home, you can leverage your equity to get a second mortgage. Equity refers to the difference between your home’s actual market value and your outstanding mortgage balance.

Equity rates are typically lower than other loan interest rates. And, if you have a significant amount of equity, you can get a mortgage at a lower interest. You can leverage your home equity through the following ways:

Cash-Out Refinancing

Cash-out refinancing allows you to take out a huge loan in place of your current mortgage amount. You use part of the loan amount to pay off your current mortgage balance and then use the remainder for buying an investment property.

With cash-out refinancing, you can take a loan worth up to 80% of your equity amount. However, you pay a higher interest rate.

Mortgage Refinancing

Under mortgage financing, you renegotiate your mortgage contract to get a mortgage with better terms. This option comes with fewer fees than cash-out refinancing. However, your lender may penalize you for not complying with your first contract.

Home Equity Loans

Here, you take a loan against your home’s actual market value. You can get a home equity loan worth up to 80% of the actual value of your home.

Get a Private Loan

Getting a loan from a private lender has several advantages. Private lenders are not as strict as financial institutions.

So they are a good option for investment property loans where your credit score is not up to par with bank requirements. Private lenders also help when there is not enough cash in your bank account.

Loans from private lenders do not have a long processing time. So you can secure the funds you need faster.

There are two types of private lenders for investment property purchases: corporate lenders like LendSimpli and personal lenders such as family and friends.

Corporate private lenders offer different types of loans for financing investment properties. Financial institutions do not offer some loans you can easily get from private lenders.

For instance, it may be hard for you to get a short-term loan on a property investment from a bank.

You have more control over the loan terms when getting a private loan. You can negotiate your payment terms and interest. Thus, you get the chance to form a good rapport with your lender.

Think About Long Term Options

Sometimes, real estate investments take time to yield a return. So it is best to invest in real estate as a long-term option.

You will likely only manage to break even on your rental property for some time before the rental houses are full. As long as you are not making losses, breaking even for some years is fine.

Securing your long-term return on investment (ROI) is essential. So consider how much the value of a property appreciates over the years. If you want to have guaranteed income in the long-term, consider buying a rental property for long-term tenants.

For instance, you can decide to host section 8 renters on your property. Section 8 renters are citizens whom the government deems eligible for rental assistance.

The Public Housing Authority pays rent for section 8 renters directly to property owners. So, you do not have to pay someone to collect rent. Additionally, there is no risk of tenants defaulting on rent.

Understand the Tax Implications of Property Investment

The income you earn from your investment properties is taxable. But property investment comes with several tax deductibles. You get to deduct depreciation on your property even when its value appreciates.

You can also write off property management expenses. This includes minor ones like changing damaged light fixtures.

You also write off mortgage payments, interests, and insurance. So with investment properties, you get to enjoy tax benefits while increasing your ROI.

Determine What It Takes to Manage a Property

Managing a rental property requires a lot. You need to be aware of the state of each rental unit. Collecting rent and managing the property are also tiring. If you have a busy schedule, you may fall out on your responsibilities as a landlord.

So if you know you cannot fully commit yourself to property management, please hire a property manager. Before allowing any tenants into your property, do a background check to determine if they are trustworthy.

Even when you live in the same building as your tenants, avoid getting too close to them. If you do, you will be unable to ask them for rent when they default.

Understand Rental Laws

Understanding rental laws help avoid legal problems. Have a set security deposit amount for your tenants. Landlords must account for the security deposits paid by all tenants.

Each state has security deposit laws. These laws determine how long you can stay before returning a tenant’s security deposit.

You must also know the laws regarding evictions. Understanding housing regulations is essential to ensure your property is up to standard.

Buy Investment Property

The guidelines above hold all the answers to your questions on how to get investment properties. So if you follow the above tips, buying investment property will be a breeze.

LendSimpli is your financing partner for all real estate investments. Contact us today to discuss your financing options for investment property.