An investment property can provide significant benefits for both your current finances and your future. But it can be a challenge to navigate the process for the first time, plus you need to manage the house after you buy it. Here’s what you need to know about purchasing and managing your investment property.
Know What You’re Getting into Before You Buy
When you decide to buy an investment property, it’s important to clarify the definition. If you’re buying a property to fix it up and re-sell it, that’s flipping—not a source of investment income. The tax implications and day-to-day management are vastly different. You need to not only manage the rental of your property, but also plan for depreciation deductions and other financial specifics.
Know Your Loans (and Save Up for a Down Payment)
Buying investment property sounds like a great deal. But the fact is, you need to secure financing to purchase the house before you can begin making a profit. Mortgage insurance doesn’t apply to investment properties, notes Bankrate, so you need at least a 20 percent down payment to get around that.
You also need good credit to secure a low interest rate, much like you would for a residential property. Or, if you already own property, you might consider using your home equity to finance the new place. Taking out a home equity line of credit (HELOC) or a home equity loan can provide a means of purchasing property—but you’ll need to budget to pay it back.
Protect Your Investment with Crime Prevention Steps
Like any other purchase, a home has value. And whether you plan to own it long-term or not, you need to protect your property. Home security should be a priority once you close on the sale—but you also need to ensure you’re choosing the most effective methods.
Consider blending high- and low-tech solutions together to fit your budget and needs. An alarm system can provide peace of mind. Additionally, trimmed shrubs underneath windows can be a natural deterrent. Improved lighting is another discouraging feature for potential criminals.
Brush Up on Your Maintenance Skills (Or Hire Out)
Part of managing your investment involves handling the property rental. Collecting rent and addressing tenant issues are part of the job. But maintaining the home is another consideration when you’re becoming a landlord for the first time. You need to set aside funds—and time—for fixing issues at the property or hire someone who can.
Whether you’re renting to long-term tenants or vacationers, hiring a property management company is an option, but it will cost you. You can expect to pay an initial setup fee, a management fee (whether a flat rate or a percentage of the proceeds), and a whole host of other charges. But for many owners of investment properties, the fees are worth it. A property manager may offer such services as tenant screening, between-guest cleaning, and 24-7 assistance, which can help keep your property safe and lead to more positive reviews of your home.
You can save money going the DIY route, but it can cost you in time. Plus, if you are unfamiliar with tenancy laws or lack maintenance skills, hiring out help may be the best option.
Make Your Property Stand out
To secure the right renters or guests, you’ll need to take steps to make your rental stand out against the competition. For long-term rentals, this could mean amenities like hardwood floors, stainless steel appliances, curb appeal and efficiencies like a smart thermostat. When it comes to a vacation rental, in addition to a prime location, there are certain amenities you’ll want to provide. Guests look for quality linens and bath towels, luxury toiletries, games and the ability to stream movies or shows on demand, a fully-stocked kitchen and even an outdoor area for relaxing.
Investment property can be an excellent financial boost throughout your life. Especially as a source of retirement income, property ownership can prove lucrative. If the conditions are right, you may want to begin searching for the perfect home to invest in—and cash in on—today.
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