A Guide to Buying and Managing Your First Investment Property
If you have some money set aside, you may be looking for investments to make so that you can put it to good use. Buying and managing an investment property is one smart option, since property is likely to appreciate in value. Done right, this can allow you to profit—first, off of a rental income, and later, through a lucrative sale. If you mess up, however, you will have wasted money on a piece of real estate that will drain your time, energy, and bank account. Find out how to avoid such a catastrophe and make an investment property work for you below.
Choose your location carefully
When buying an investment property, location is crucial. You might be able to get a cheap piece of real estate in an unpopular geographical area—but you also won't make much money with it. Forbes offers a list of the best rental markets in the United States, from Colorado Springs to Boston. When choosing a location, opt for something that isn't too far from where you live. When you stay within your geographic region, you benefit from a more intimate knowledge of the market—for example, if a neighborhood currently deemed dangerous is actually up-and-coming. It will also make it easier to manage the property if you are within driving distance.
Prepare your financial documentation before purchasing
Before you jump into the real estate market, get your financial affairs in order. Once you’ve zoned in on a general location, use a tool like Zillow to scope out housing prices. This will allow you to get an idea of costs so that you can calculate a down payment, which is usually 20% of the property sale price. While it is possible to make smaller payments, this will result in higher interest rates and larger monthly payments down the line. If you are planning to rent the property out, ideally the rent you charge will cover the mortgage and then some.
Prepare the property for use
Once you buy a property, it won't necessarily be ready for use immediately. You have to make decisions, such as whether you want to rent it out furnished (this can allow you to charge a higher rent). You may also want to make home modifications that will allow you to demand a higher price, such as adding luxury touches like a jacuzzi tub. To keep the property safe, invest in a comprehensive home security system. You can expect to pay $675 on average for a typical installation. Expect to pay more if your system includes technology like cameras and lighting. The investment will be well worth it, however, as it keeps your property safe. Plus, it will mean lower insurance rates.
Establish a network of professionals to support management
Once you have your investment property up and running, take the time to scope out potential renters thoroughly. Pre-screen using a written application, which can address everything from pets to criminal background checks (some landlords require them). You can also use social media as a pre-screening tool. To ensure your investment property stays in good shape and doesn't suffer needless damage, go ahead and surround yourself with a team of home improvement professionals before you even need them. Having a plumber or electrician to call in case of emergencies can save you time and trouble in the future (the average cost of an electrician, for example, is between $50 and $100 per hour).
Another idea is to hire a property manager to coordinate all of this. And while it will cut into your profits a bit, having a management company handling these issues can ensure the job gets done right, which is even more valuable if you live a long distance from your property. A competent property manager can keep guests and tenants satisfied by handling day-to-day local support, adding modern security measures like digital locks, and cleaning between guests (if you’re renting to vacationers).
While preparing to buy and manage an investment property can be intimidating, it doesn’t have to be. Simply take your time and follow the above steps. You will find that when you approach this investment strategically, you are bound to have success.
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