How do you know when you’re ready for your first investment property?
Owning an investment property is a little more complicated than owning your own home. And qualifying for a mortgage on an investment property is a little harder than qualifying for a mortgage on your primary residence.
But the benefits of owning long-term rental properties are worth the extra effort! With a good investment, you get:
Monthly cash flow,
Property value appreciation,
Tenants paying down your mortgage debt, and
Tax breaks.
So becoming a real estate investor is well worth considering. Here are five questions to help you decide if you’re ready for your first investment property.
1. Do You Have Enough in Savings?
You’ll need to have enough money saved to cover the down payment (usually at least 15% for an investment property) and closing costs. But you’ll also need to cover the mortgage while the property is vacant. And you’ll need to have reserves for the inevitable maintenance issues that come up without warning.
You might also want to renovate the property before inviting prospective tenants to tour it. In addition to the cost of labor and materials, you’ll be missing out on rent as the property remains vacant during this renovation period.
Make sure you have enough money in savings to cover all these costs before buying your first investment property.
2. Do You Make Enough Consistent Income?
You might not be worried about your income since you’re planning on having the rent from your investment property cover the property’s expenses. But your lender will need assurances that you make enough money to cover the expenses during a vacancy or in the unlikely event that rent prices suddenly dip.
Investment property lenders need to see a debt-to-income ratio of 45% or less. This means your monthly debts can’t exceed 45% of your pre-tax income.
3. Do You Have Good Credit?
While borrowers can get a home loan with credit scores in the high 500s, the standard is higher for investors. Unless you plan to put down a large down payment (25% or more), you’ll likely need a credit score over 700 for a traditional mortgage loan. And if you’re looking for the best possible interest rates, try to maintain a score of at least 740.
4. Do You Have the Time to Manage the Property (or Extra Money to Hire Someone)?
Rental income is largely passive, but you will need to invest time in:
Finding and screening tenants,
Drawing up leases and renewals,
Collecting rent, and
Addressing maintenance issues.
You can handle this yourself, or you can pay a property manager to handle it for you. Property managers typically charge around 7-10% of the monthly rent.
5. Do You Have the Skill to Manage the Property (or Extra Money to Hire Someone)?
You don’t need to be a handyman to own an investment property...but it helps! Similarly, you don’t need to know everything about leasing and real estate contracts to be a landlord...but, again, it helps. If you don’t have the skill to manage the property yourself, and you have no interest in learning-on-the-job, make sure you budget for a property manager to handle these tasks for you.
So are you ready for your first investment property?
Contact us today for a free list of investment property opportunities. We can also keep an eye on the market for you and alert you when we learn of a property that might be a good fit for you. We’re excited to help you become a real estate investor!