How Do You Buy Your First Investment Property?

A major step in any investor’s journey is purchasing your first rental property. It is one of the most valuable assets that you can purchase, and it can also be a great way of generating passive income.

Before you can become a real estate mogul or build an empire, it is important to understand the basics. It is essential to learn how to locate a house, get mortgaged and rent it out with good tenants.

Let’s look at what you need to do to buy investment property in Orlando. We’ll also discuss the difficulties you might face. Although purchasing a rental property will be similar to purchasing a primary residence there are unique differences you need to consider.

These tips and tricks will make it as easy as possible.

Are You a Good Investment Property?

Real estate investing is not for the faint-hearted. You must consider operating costs and mortgages, as well as the potential impact on your investment. Tenants are also important. Owning a rental home is more risky than investing in the stock markets. If you have bad tenants that don’t pay their rent on time, your returns won’t be just diminished, they will disappear. Although the stock market might only bring in 4% to 5.5% per year, you can still count on it with some confidence. An investment property is a greater gamble. You can also get a greater reward if you take a larger gamble, which is especially true with investment properties.

The average gross return for rental investors in 2016 was 9.4%. This is slightly lower than previous years, but still significant. This is nothing to be proud of. You also have greater control over your investment property that you do the stock market. Even if you purchased every Diet Coke at your local grocery store you wouldn’t likely be able influence Coca-Cola’s stock prices (at most not significantly). There are many factors that can play a role. You’re riding the wave of a stock market that is already in place. You can make small improvements to your investment property such as adding a door or making minor kitchen renovations that will increase the chances of getting good tenants for higher rents. You are not only riding the wave but also owning the wave with investment properties. This is a great option for those investors who want to be involved in the process.

How to get a mortgage for an investment property

The big question that people have when buying a property is “How much house am I able to afford?” This can be used to determine the rates and monthly payments. You can then get preapproved to find out how much money you are eligible for. Your Home Loan Expert should know that you are interested in purchasing an investment property. These properties have different rules than primary residences.

Be Preapproved First

Searching for a property prior to securing financing is one of the biggest mistakes home buyers make. Let’s suppose that you have spent months searching for the perfect rental property. The house may already be under contract with another buyer by the time that you are preapproved for mortgage financing. You can get preapproved right away and be able to grab a great deal in a flash.

The problem with looking before you are preapproved, is that you don’t know how much you can qualify for. It would be heartbreaking to look at houses in a certain price range only to discover that you are eligible for less. Preapproval allows you to make informed decisions about the investment property that you want to purchase.

Agency Loans For Investment Properties

An agency loan is the best option for an investment property. This means that the loan would be backed either by Fannie Mae and Freddie Mac. An FHA or VA loan is not available for investment properties in most cases. This exception would only apply if you plan to purchase multiple units and live in one unit and rent the rest. Talk to a Home Loan Expert if you are considering this route.

How to Purchase an Investment Property

You can choose from a fixed-rate or adjustable rate mortgage (ARM) as your agency loan. Each option has its own requirements regarding the down payment, credit score, and credit score.

What credit score and down payment are required to buy an investment property?

A fixed-rate mortgage requires a minimum credit score of 620. It will also require a 20% downpayment. A single-unit investment property is only available to those with a credit score above 720.

A minimum credit score of 620 is required for an adjustable-rate mortgage. You will also need to put down at least 15% on single-family investment properties.

To discuss your options and requirements for purchasing multi-unit properties, contact a Home Loan Expert

Additional requirements are required to qualify

Except for the down payment, requirements for renting a property are similar to those for a mortgage on a primary residence. The 2/2/2 rule will still apply: Provide two years’ worth of tax returns, two year of W-2s, and two months of bank statements for your mortgage company. Also, verify your assets.

In order to provide some cushion room for unexpected financial difficulties, your mortgage company will ask you to keep six months’ worth of mortgage payments in reserve.

Why should I get a mortgage for my investment property?

A mortgage is a good option if you don’t have the cash to purchase an investment property. This is especially true if you plan on purchasing multiple properties. Let’s take, for example, $100,000 that is sitting in the bank.

The first is to purchase a house with cash for $100,000. Although you’ll get more cash from this investment, it also ties up your entire cash.

However, if you can get a loan with 20% down you could purchase another house at the same price as the original with $80,000 remaining. Although your cash flow will be lower immediately, the long-term returns will increase, particularly as rents rise and mortgages are paid off. A mortgage is a better option than cash. You can build assets faster.

If you do not have the cash to purchase an investment property, there might still be loan opportunities.

Rocket Mortgage product manager James Milne explains that “a large portion of investment properties in America are not financed by a mortgage. This means there are many opportunities to make cash and to invest equity in improving a property.” These clients have the option of a cash-out refinance.

This option could help you make your investment work for yourself.

How do I determine the potential ROI of my rental property?

The first thing you should ask when looking for great investment properties is “Can it actually make money?” You can use the return-on-investment (ROI) to determine how much your property could make. First, calculate the property’s annual net income to determine the ROI. This is the amount of rent money left after paying the taxes, insurance, property management fee, expected repairs (plan for 1% of the property’s value), possible vacancy periods, HOA dues (if applicable), and any other utilities not covered by the tenant. Divide the annual income by the property’s cost to calculate the ROI. If the net annual income is $7500 and the property cost $100,000, the ROI would be 7.5%.

What makes a good investment property?

To determine if the property is a good investment, you need to look at certain criteria when searching neighborhoods for your first rental. You want a house with low maintenance, fewer vacancies, and a high rent-to-value ratio.

No Fixer-Uppers

A fixer-upper is one of the most common mistakes made by new investors in real estate. Don’t buy a property that “needs a lot more TLC” if the listing says so. This is a scam that I fell for once. The house had missing interior walls, needed new plumbing throughout, and a basement that was flooding on a semi-monthly schedule. There are few things worse than realizing your cash cow is actually a money pit.

This exception is only if you are skilled in home repairs. You may be able do these large-scale repairs more efficiently if you are a skilled handyman or know someone who is. It’s generally easier to buy a house that is in good condition than to fix it up. They are out there. Do your best to resist the temptation of a fixer upper.

There is no vacancy

Your investment property won’t be worth much if it doesn’t have any paying tenants. Your property should be attractive to any tenant, but also to good tenants that pay on time and don’t throw their Cosmo magazines away (speaking from experience).

Depending on where you live, certain places have lower rates of vacancy. This is the case for San Jose, Calif. and Fort Collins, Colo. which both had a 0.2% rate of vacancy in 2016. While you can do research about the area where you are interested, it is best to spend some time driving through the streets around your potential property. You can get a good idea of vacant houses by simply looking at the care taken to them.

The 1% Rule

New investors often ask the question, “How much should I rent a property?”. Seasoned investors use the 1% rule which says that rent should not exceed 1% of the purchase price. If you bought a house for $100,000 you would have to rent it out for $1,000. Investors may not always agree with this rule, so some will accept a lower return.

To ensure that your potential property is able to receive this kind of return, get rental estimates from similar properties in the area. Although you may be able charge more or less than the listed price, it gives you an idea of what a reasonable rental rate would be.

Are you a Landlord?

You need to be realistic about how you will manage the properties you purchase when you first start investing in them. Being a landlord is a difficult job. I have seen many investors become overwhelmed by the amount of time required to be a good landlord.

Fun fact: This type of investor is worth looking out for. Sometimes they get overwhelmed by their landlording responsibilities and decide to sell their entire portfolio. It is a great time to buy and swoop in.

However, not everyone is qualified to become a landlord. This is a demanding and time-consuming job, especially if your day job is already full-time. This is why I recommend hiring a management company to handle this job.

While you will likely spend 9% to 11% on this service, they will still take care of tenants’ needs and collect rent. They will also assist in the eviction of tenants if necessary. It is important to remember that time is more valuable than money. This will allow you to make additional investments.

Keeping Track Of Repairs

You will have to pay income taxes as you make income from your investment property. However, rental properties can offer great tax benefits. There are many possible deductions whether you hire someone to repair your property or pay interest on your mortgage.

Wisdom words: Keep track of all expenses, which will include receipts, in case the IRS calls. You should make the most of tax deductions to maximize the value of your investment property.

Another perk to using a management firm is this. They will keep track of all your rental expenses and mail them to you in a nice document for tax season. This saves you time and is well worth it.