An increasingly popular way to grow savings for retirement and achieve financial wealth is to purchase an investment property. While some of the basic steps are the same as when you purchase your own home, there are additional things to consider when your purchase is an investment property.
First and foremost, you need to know your reason for wanting an investment property in the first place. You need to set clear expectation with realistic goals. In order to have clear expectations, you need to know the following:
- How long until you plan to retire?
- How much money do you anticipate needing at the time you retire?
- What other retirement plans do you currently have or plan on having?
- How much money do you currently have to invest and how much more do you need in order to get started with your investment property?
Having this information will help you get started and will also help to keep your eye on your end goal.
Save for a down payment. While many people wait to consider the down payment until after they get pre-approved, if you are in the beginning stages of planning for an investment property, it makes sense to have a general idea of how much you plan on spending on your property, therefore you can calculate approximately how much you will need for your down payment. Always plan on having 20-30 percent saved for you down payment. If order to achieve this, you should plan on:
- Paying off any lingering debt
- Reduce unnecessary living expenses
- Take on more hours or a second job if needed
As with any property purchase, you need to get pre-approved for your mortgage in order to determine what you can afford. Without knowing what amount you will be approved for, you cannot realistically search for a property that you like and will suit your needs. Take the time and speak with various lenders about investment property financing and what option is best for you.
If you don’t already have one, now is the time to find an agent to work with. Real estate agents have the experience and ability to locate the type of property you are looking for, offer advice on the neighborhoods you are considering, and have experience in negotiating the deal and handling the paperwork. On top of all of this, they will be able to provide recommendations for appraisers and inspectors, as well as contractors if needed.
Find the right property for you. You need to know where the right location is for you, research the schools in the area, know the job market and know if the area is “up and coming” or if people are leaving the area. Keep in mind that when you advertise for renters, potential renters will be asking these same questions. The answers you are able to give will indicate what type of renter (single or family) you are likely to get, and how much you can realistically anticipate getting in rent.
Take the time to seek advice from other landlords in the same area you are planning on purchasing your investment property. Ask them for advice and if they can offer any insight, including recent population growth, job growth and experience with renters in the area.
Also, research and prepare for additional expenses that will go along with owning a rental property, such as property taxes and cash for unexpected repairs. It is also important to remember that you will need to invest time and money each time a renter moves out in order to get your property ready for the next renters.
Once you have found a property you want to purchase, work with your agent in getting your home inspection, which will determine if there are any issues with the property you should know about, and also hire an appraiser to be sure the property is actually worth the amount you offer.
In closing, deciding on the right investment property is more than just deciding you want to be a landlord in order to make money. Do your market research, be sure the property you decide on is in an area that can bring positive cash flow, know how much money you need to make in order to build your retirement, and make sure you have the right agent and professionals on your side to close the deal that will work for you and your expectations in the long run.