Buying income property comes with incredible benefits for real estate investors. Income property can produce cash flow, which can provide a good source of retirement income. Moreover, as you pay down your mortgage, you will be able to build equity and create wealth over time. However, this doesn’t mean that everyone who buys an income property will earn a fortune. Contrary to popular belief, buying a rental property is not an instant road to riches. For all those benefits, it comes with its fair share of risks and downsides. If you are aspiring to buy one, just know that it’s not going to be a walk in the park.
I’m not trying to talk you out of investing in rental property. In point of fact, if done right, it could be one of the best decisions you will ever make. However, there are a number of things you need to know and do before buying your first income property for you to be successful in the business. You shouldn’t buy a rental property if you don’t have a good idea of what you are getting into. Rather than jumping into deals, every new real estate investor should put in proper work and build the right foundation first. You don’t want to be the one to learn things the hard way. If you are a new real estate investor looking to make good profits and avoid pitfalls, this blog will give you some insight into what you should know before buying income property.
Put Your Finances in Order Ahead of Time
Buying income property isn’t cheap. In fact, for most aspiring real estate investors, finances are usually the main obstacle to achieving their goals. As you explore the prospect of buying your first rental property, it’s crucial to keep in mind the amount of money you will need and then put your finances in order.
There being many investment property financing options with different benefits, you should do your due diligence and choose one that best suits your goals and financial standing. For instance, are you able to raise a down payment for a mortgage loan or should you explore ways of buying income property with no money down? If you’ll be going for a mortgage loan, you will need to raise a down payment of at least 20%. As such, make sure you have ample financial sources. Otherwise, how are you even going to afford the property?
Look to save as much money as possible for your down payment even if it means moving to a cheaper house, asking for a raise, or finding a second job. You should also try to clear all your debts. Don’t forget to check your credit score early enough and address it. It is possible to repair your credit, but it will take time. Having a good credit score is one of the things that will persuade lenders to give you a loan. Also, compare the requirements of different lenders to find one that would suit you best.
Related: How to Get Your Finances in Order Before Buying an Investment Property
You Shouldn’t Let Your Emotions Affect Your Investment Decision
Buying income property is very different from buying a personal home. Many first-time real estate investors don’t understand this and tend to get emotionally attached to their first income property. This often leads to wrong investment decisions. When it comes to buying property for rental income, you need to think logically, listening to your head and not your heart. If you want to maximize your return on investment, always keep the housing market in mind. Do not focus on your individual preferences and tastes. Your emotions have no place in real estate investing or any other kind of investment for that matter.
Finding a profitable income property for sale is a game of numbers. There are many variables determining the profitability of an income property. So, you will need to analyze several investment properties and select the best one. Even before you begin your search, make sure you know what to look for when buying income property. You will need to stay detached from the deals and get the numbers right.
As a first-time investor with no real estate experience, working with a professional real estate agent to guide you through the buying process would be a wise decision. Agents usually have extensive real estate knowledge and experience and will help you avoid costly mistakes. Hiring one will definitely cost you money upfront. However, you will save more time and money in the long run.
You should also be using online tools to help you find the best investment properties. Mashvisor’s real estate investment tools are the best in the market for finding income properties that are profitable and in line with your investment goals. Be sure to use Mashvisor to conduct a thorough real estate market analysis and investment property analysis before buying an investment property.
Start looking for and analyzing the best investment properties in your city and neighborhood of choice.
Your First Investment Property Should Be a Low-Cost Home
When buying income property for the first time, it is advisable to start low. Even if you have a considerable amount of money and are ready to go all-in, the reality is that it would likely be a bad call if you are inexperienced in real estate investing. As a beginner real estate investor, you still have a lot to learn and are likely to make costly mistakes. It would be wise to go for residential income properties that are in the lower-to-mid-range price brackets. Generally, your first investment property shouldn’t cost you more than $150,000.
Keeping your first investment as low as possible will help you mitigate risk. You may not generate your desired profits but you won’t risk losing a lot of money. The more expensive the investment property, the higher the ongoing costs like utilities, property taxes, repairs, and maintenance will be. You may also need to spend more money to renovate the property before you rent or sell it.
When you are starting out in the property business, consider investing in simple single-family homes and learn as you go. It would be better to make novice mistakes on a cheaper investment than with one with higher stakes.
There May Be Unexpected Expenses
Owning one rental income property is essentially putting all of your eggs in one basket. It’s like having the whole of your portfolio comprising of stock in one corporation. Therefore, when you buy your first income property, you will vulnerable to certain risks. One major risk is having unexpected expenses.
According to the 1% rule of real estate investing, your rental income should be at least 1% of the total purchase price of the income property. However, unforeseen expenses can bring financial stress. This makes your rental income quite unpredictable. For instance, your tenants may abruptly stop paying rent for one reason or another. Evictions could also take a while and be costly. Also, the property may be damaged and require urgent repairs, which may be costly.
Such incidences may reduce your cash flow considerably. Consequently, you may be forced to pay for the mortgage, insurance, property taxes, and maintenance from your pocket. Therefore, prior to buying an income property, you need to plan for such expenses. One way is to have an emergency fund to deal with such situations whenever they arise. Carefully screening your tenants can also keep you away from bad tenants who don’t pay rent in time or cause property damages.
Related: The 6 Hidden Costs of Owning Rental Property
Managing Income Properties Is a Lot of Work
One common mistake new real estate investors commit when buying income property is underestimating the amount of time and commitment it takes to successfully manage it. In fact, some imagine that after buying an investment property, they would just pull back and wait to collect monthly rent. This is far from the truth.
In actuality, there are many tasks involved in managing an income property that demand your time and commitment. This includes marketing, tenant screening, repair, maintenance, dealing with rent issues, record keeping, turnover, evictions, etc. Be prepared to receive calls from tenants even in the middle of the night requiring you to act on an issue. Are you really ready to handle all these tasks? If you aren’t, the alternative would be to hire a professional property manager. Even though it will eat into your rental income, it may be well worth it.
Keep in mind that your effectiveness in managing your property investment will determine the profitability. Also, note that the management responsibilities may vary depending on the type of income property in question. For example, a triplex will definitely be higher maintenance than a small single-family home. You should consider this when choosing the kind of property to invest in. Find an income property that best fits your lifestyle and time availability.
Related: Rental Property Management Tips for Landlords
The Bottom Line
Buying income property can be an excellent real estate investing strategy and a key to financial freedom. For this reason, the prospect of buying your first income property can be very exciting. However, you need to understand that buying rental property needs a lot of research and preparation. While the act of buying an investment property may take only a few hours, there are some important things you need to know and do before committing to a purchase. Doing things the right way from the start will put you in a better position to be successful.
Make sure you take into account the above considerations before you even think of purchasing your first rental property. As you gain more experience in the industry, you will be able to learn more. With that said, definitely, buying income property will not be a good fit for everyone. If these considerations seem too much trouble for you, there is no shame in looking into other real estate investment strategies.
