Have you ever considered owning rental property? It can be a fantastic way to invest in your future and build long term wealth. Rental income can bring in extra cash flow each month and the property value may increase over time. Here are some things you need to know about buying investment property.
What is an investment property?
An investment property is a property you buy not to live in yourself but to rent out to tenants. It can bring in steady income each month from rent payments. Over time, the property value might also increase, giving you a potential future profit when you sell.Â
Types of investment homes
The world of investment properties offers a variety of options to suit your goals and budget. Here’s a breakdown of some popular choices:
- Single-family homes:Â These are standalone houses that landlords can rent out to tenants. They are popular for first-time real estate investors due to their simplicity and lower upfront costs.Â
- Multi-unit properties (duplexes, triplexes, fourplexes):Â Owning a building with multiple units can offer higher rental income. However, they also require more management effort and can come with higher maintenance costs.Â
- Accessory Dwelling Units (ADUs): An ADU can be a converted garage, basement apartment, or even a tiny house built in your backyard. Because it’s a separate unit with its own entrance and cooking facilities, it can be rented out to tenants for additional income.Â
- Land:Â While purchasing a lot may not make you a landlord, it does offer the opportunity to sell in the future. This investment will benefit you when someone is looking to build a residential or commercial property.Â
Understanding the costs
When looking for an investment property, it’s important to understand the ongoing costs of owning investment property. Here are some key expenses you need to factor in:
- Mortgage payment – this is usually your biggest monthly expense, make sure to figure in principal and interest. Most payments will include taxes and insurance
- Property taxes – these may be included in your monthly payment but remember they will vary every year.
- Insurance – You will want to make sure you have landlord insurance to protect your investment
- Operating Expenses – These include maintenance costs, repairs, property management fees and vacancy periods. Don’t forget to consider potential expenses like roof replacements or appliance upgrades.
How to finance an investment property
There are different options for financing an investment property.
- Conventional loans – this is a typical way to finance an investment property. Usually you need 25% down and the rates will be a little higher than a rate for a primary residence.
- HELOC – some people will use the equity in their primary residence to finance the investment property. Or they use that for the down payment on the investment property
- DSCR loan – this is designed for investment properties and is based on the properties cash flow rather than the borrower’s income. Sometimes it’s easier to qualify this way as it is based on the property income and frequently there is no limit to the number of properties you can finance. It may require higher interest rates and can be a bit more complex to understand and qualify for.
Are you ready to be a landlord?
Before buying an investment property, make sure you are ready to be a landlord! Do you have the time and resources to manage a property? If you do not hire a management company, your tenants will be calling you for repairs and you will need to find new tenants when someone moves out. Remember this is a long term investment, it’s not flipping homes and making a quick dollar. It’s about steady income and potential appreciation over time.
There can also be tax benefits to owning an investment property. You can deduct expenses like mortgage interest, taxes and insurance payments. Maintenance costs can be deducted, along with advertising. Working with a tax professional can help you maximize these benefits.
If you decide you want to become a landlord, talk with your realtor about homes that might make a good investment. Maybe you want to buy a new home to live in and start renting out your current home. Many people start that way. As long as you understand the costs and responsibilities, it can be a great way to make money – just remember it’s a long term investment.
Leslie Vanderwerf, NMLS ID#335509, CrossCountry Mortgage LLC, An Equal Housing Lender, NMLS#3029 – Email – Website
