For all its work, there are many benefits involved with buying an investment property. But, you can’t go into the process blindly, and you will likely need help along the way. If you’re in the early stages of moving from being a landowner to a landlord, keep reading. Here, we have a few pieces of advice that can save you money and headaches along the way.
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Start by knowing your goals.
Before you make an official decision, step back and evaluate your end goal. Ask yourself why you want an investment property. Is it to supplement your retirement, or do you want a personal retreat that pays for itself? You’ll also want to ask yourself how you plan to manage it. Unless you have experience as a landlord, there are many things you may not have considered.
Research the local market.
When you are comfortable with your decision, you can move forward. This starts by researching the local housing market. Since this is an investment, you’ll want to know how much you can expect to spend.
The real estate climate isn’t the only market consideration. You also have to pay close attention to tourism and/or whether or not rental properties are hot in the area. If you plan to own a vacation investment home, spend a few weeks playing tourist. You can use TripAdvisor to help you pinpoint local attractions. When you plan to use your rental as a residential property, you should know the cost of living in the general area, as that will help you come up with a monthly rental fee.
Make sure to have money down.
One thing that is significantly different than when buying your family home is that most lenders require 20 percent down for an investment property. For a $200,000 home, you should plan to pony up with about $40,000, plus you also have to pay closing costs and make any modifications necessary to make the property safe and compliant with local and federal laws.
Also, keep in mind that depending on when the property was built, you might have to meet ADA guidelines. SFGate also notes that landlords are typically responsible for paying for accommodations for disabled tenants, including an entryway ramp.
Understand additional expenses.
In addition to your down payment, upgrades, and potential disability accommodations, you’ll also have to pay for other expenses. Property taxes is one of these, but you also need to budget for things like a home inspection and appraisal. Each of these is crucial to the process because you don’t want to wind up with a property that’s worth less than you paid, and it’s not beneficial to your bottom line to buy a home or condo with significant material defects that might render it uninhabitable without extensive repairs.
Upgrading your home to make it more desirable for tenants can come at a considerable cost, so be sure to budget for the expense. For example, even a minor kitchen remodel can cost over $22,000.
File the paperwork.
Now that you’ve made the decision to start a rental property business, you’ll need to file the long list of legal documents needed to start making money. There are several types of businesses you can file for, but we recommend filing an LLC since it’s simple and protects your personal assets should you face legal damages.
After filing your Articles of Organization, getting your FEIN from the IRS, and filing even more paperwork with the Department of Revenue and opening your business bank account, you can finally get started. If that all sounds a bit hectic, you can also choose to hire a company that specializes in filing business documents to save time.
Get the right people on your side.
Finally, don’t try and buy an investment property without experts to back you up. You’ll need an experienced realtor like Stacy Zigman, property management firm, and mortgage banker. Each of these individuals can help you buy, manage, and finance your investment, respectively. When hiring a property manager, make sure to find one that can provide your tenants local on-site support for any issues. Some companies will even screen tenants and install modern security systems and to help prevent fraud and damage to your home.
An investment property, whether as a vacation home or a yearly lease situation, can help you supplement your income, but you have to do the work ahead of time to ensure that you are getting the most out of your money. Start by researching the markets, make sure you have plenty of money aside for a down payment and necessary spending, and, most importantly, don’t go it alone.