The first thing you need to be aware of when buying an investment property is the fact that it’s not a family home. This means that your subjective impression of the place isn’t the most important metric in choosing. Sure, if you like the place, the others might like it, as well, which means that you’ll find tenants a lot easier and even sell the place more quickly if you decide to do so in the future. So, from the very start, try to understand what you’re looking for something entirely different since you have to focus on ROI and not on the lifestyle. With that in mind, here are the top eight things you need to know before buying your first investment property.
Is it the right time to invest?
Creating a new stream of passive income is always a great idea, however, you need to be aware of the fact that it may require an investment that, at the moment, you’re not able to make. So, start by considering whether it’s the right time for you to invest. Investing before you’ve cleared the bulk of your debts (especially those with the highest interest rate) is definitely a bad financial move. Therefore, try putting everything on paper and give it your best to figure out whether it’s indeed the best time for you to invest or if you should wait for a while and consider focusing on something else instead.
Don’t be too subjective and emotional
The next thing worth keeping in mind is the fact that you should look at the objective features of the place instead of thinking with your emotions. Sure, residential property needs to feel like home, however, whether or not the place feels like a home to you is not always an issue that you need to focus on. Instead, try looking at the place through numbers in order to get a more objective image and make your decision more fact-based.
How hard it will be to find a tenant?
Perhaps the most important question that you need to ask before buying an investment property is one of how hard it will be to find a tenant. This is due to the fact that vacancy loses you money, seeing as how the bills will still be arriving, even if there’s no one living at the place. In order to determine how hard this will be, you need to consider three factors that your tenants will be the most interested in. The first one is the location of the place, the second one is its energy-friendliness (which affects the bills) and the last one is the cost of the rent.
The next major issue that you have to resolve is one of the potential return on this investment. Here, you have to learn the one per cent rule, which claims that residential property should return between one and two per cent of its total value on a monthly basis. For commercial property, however, this figure goes between 4 and 5 per cent on an annual basis. The return, however, also depends on the initial investment which is why you should calculate everything in advance.
Over time any property loses value. This is the so-called phenomenon of depreciation that applies to virtually any asset. According to it, every asset starts at the peak of its value and, over the course of time, its value reaches zero. Now think about it, is there any logic that you should pay the same in property taxes for a new and old property? Of course not, this is what a tax appreciation is there for. So, if the property is not new, you need to know exactly what you’re getting into.
We’re not just talking about the repairs and the maintenance but about the fact that the energy efficiency of the place won’t be that great and the fact that it will be easier to find a tenant this way. In order to learn exactly what you’re getting into, you might want to look for a professional assessment by industry veterans like those behind WRC Quantity Surveying.
Low-cost home as a first investment
There are several reasons why your first investment should be a low-cost home. This is because it will help you understand all the follow-up costs without putting you in too much trouble. Second, the risk is lower, which means that even if you end up losing money, you won’t lose nearly as much. Finally, you’ll have a chance to figure out the entire procedure on your own example which can be simply invaluable. Also, this will make the entire experience a lot less stressful.
Do all the inspections
Prior to buying, it’s essential that you do all the necessary inspections on the place. This ranges from all the electrical installations, plumbing, pest inspection, as well as doing some inspection to your attic and roof. The reason why this is so relevant is due to the fact that it indicates on the state that the building is in, as well as helps you get the idea of how costly the maintenance and how frequent the repairs will be. From a financial standpoint, this is a most definite must-do.
Consult your budget
Once you decide to invest in a property, you need to know where the money will come from. So, if you aim to raise a loan, try to check your credit score and start slowly improving it (if it even needs improvement). As we’ve already mentioned, investing in residential property is not your only option. You can also buy a commercial piece of real estate or give your money to a real estate fund.
Learning how to make an investment in a real estate property can help you create a passive stream of income that can provide you with a higher level of financial stability and independence. Still, buying your first investment property is still a major decision and it’s not something that should be done lightly. Therefore, you need to make some considerations before buying your first investment property and here are several things that serve as a good start.