What to Know When Thinking of Buying an Investment Property

Many “regular” people have considered buying an investment property to rent out. They have some extra cash to use for a down payment and know that real estate is a great long term investment. They don’t know where to start or what to look for. Here are 11 key points to consider when buying an investment property.

1. Location – Choose an area with strong rental demand, good amenities, low crime rates, easy transportation, and future growth potential. It’s important to choose an area where people want to live and an area where property values are going up. Not only will you get good rent, but your property value will grow quickly.
2. Market Research – Analyze local real estate trends, property values, and rental yields before making a purchase. An area may be up and coming with new stores, restaurants, and jobs. Or an area could be declining with people moving out and business closing. Be sure to understand the area’s market before purchasing a property, no matter how good the deal may appear.
3. Property Type – Decide whether to invest in residential (single-family, multifamily) or commercial real estate based on your goals and budget. This includes how much money you have to invest and how much risk you can take on. If you’re just starting out, you may want to choose a property that’s easy to rent and low risk even if it’s less lucrative.
4. Financing Options – Explore mortgage options, down payment requirements, and interest rates to secure favorable loan terms. Each type of property will have different requirements. Talk to your lender about the amount of money you need to put down, the interest rate, whether it’s a 20-year or 30-year term, and if it’s a conventional or commercial mortgage.
5. Accountant’s Advice – Before purchasing a property, talk with your accountant for advice. Ask about the differences in purchasing a property in your own name or through an LLC. Find out if there are any tax implications and benefits. Ask what things you should track with a property, including renovations and repairs. 
6. Cash Flow Potential – Calculate rental income versus expenses (mortgage, taxes, maintenance) to ensure positive cash flow. Get an estimate from your lender for the loan on a property before writing an offer. Review the leases and who pays for what. Work with an experienced realtor to help you know costs versus the potential rental amount. 
7. Property Condition – Inspect the property thoroughly for repairs or renovations that could impact your budget. Keep money aside for capital improvements and regular maintenance, such as yearly furnace cleaning. Have a savings account for large expenses, such as a new roof.
8. Tenant Demand – Consider the target tenant demographic (students, families, professionals) and their rental needs. The number of bedrooms, the finishes inside a home, the location, and the area all affect what type of person will be interested in renting your property. 
9. Legal Implications – Understand landlord-tenant laws, zoning regulations, and proper disclosures. This includes using an approved lease, supplying rules and regulations, setting up a separate bank account for deposits, and so on. 
10. Property Management – Decide whether to self-manage or to hire a property management company for tenant screening, rent collection, and maintenance. If you self manage, you will be hands-on from filling the rental to collecting rent each month, to taking maintenance calls day or night.
11. Exit Strategy – Plan for potential resale, refinancing, or long-term holding to maximize your investment returns. Before you buy a property, consider ways to get out ownership if you choose to do so. Maybe you want to pull money out of the property in a few years. Or maybe you want to use the equity for a line of credit. These are all things to consider when purchasing a property.

If you are brand new to real estate investing, consider attending local real estate investing groups to learn more. Be sure to consult with professionals like your accountant, a property management company, and an experienced real estate agent. An investment property can be a great place to put your money, bringing you monthly cash flow and growing equity.