Buying an investment property is a lucrative diversification strategy for many people. However, as with any investment strategy, you’ll want to do research first to make sure that this particular avenue is right for you. With that in mind, we have your back. We’ve compiled the three biggest questions that you need to ask yourself before buying an investment property. Read on to see how your answers shake out.
Do the numbers make sense?
Obviously, if you’re going to buy an investment property, it needs to make financial sense. While it’s impossible to know what maintaining a rental property truly costs until you take over ownership, you can work up some figures to give yourself an idea of whether or not buying a particular property is a smart choice, financially.
To do so, first find your cap rate, or the ratio of a property’s net income to its purchase price. This will give you a yardstick to measure properties against. To find y0ur cap rate, do the following:
Do this equation for each property that you’re seriously considering purchasing. The higher the cap rate is, the better your returns could be, so keep an eye out for high percentages.
How will I pay for it?
While there are many options for financing these days, unfortunately, not all of them are available to investors. FHA loan programs, which offer some of the lowest downpayment options, are only available for those who are intending to reside in the property. With that in mind, you may have to do some research when it comes to how to pay for your investment property.
Below is a list of the most common options:
Am I ready to be a landlord?
There’s no getting around it: being a landlord is hard work. If you choose to take on this responsibility, you’ll have to contend with marketing the property, finding tenants, and handling ongoing maintenance issues. Before buying, it’s crucial that you’re honest with yourself about whether or not you’re equipped to handle these responsibilities.
That said, not wanting to do the legwork doesn’t necessarily disqualify you from having real estate as part of your investment portfolio. You always have the option to hire a property manager, who can take care of the day-to-day operations for you. However, if you decide to go this route, you need to make sure to hire someone whom you trust and to account for that expense in your operating expenses.
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