Understanding Investments in Real Estate: The Basics

Are you thinking about purchasing a property to rent it out or using it as a holiday home? It has the potential to become a steady source of income. But before you take out a loan for your first investment property, you must ensure you’re prepared.

Here’s a crash course on everything you need to know about becoming a landlord.

Investing in Real Estate

An investment property is a piece of real estate bought to make money from it by renting it out or selling it. Most investment properties are not bought by just one person but by a group of investors.

3 Ways To Tell If You’re Suitable For Investing In Real Estate

You should know that buying an investment property is different from buying a home. Be sure you meet the following requirements before investing in real estate.

1. You Have a Stable Income. It’s usually harder to buy an investment property than a traditional home, especially if you plan to rent it out. Most mortgage lenders require borrowers to have at least a 15% down payment for investment homes, which is usually not necessary when you purchase your first house. Many jurisdictions require investment property owners to have their properties inspected before allowing renters to move in, in addition to a more significant down payment. You need to factor in the one-time costs of buying a property (e.g., a down payment, inspection fees, and closing charges) and the ongoing costs of maintaining the property (e.g., routine repairs and emergency fixes). Good tenants are crucial to maintaining low costs, so include advertising and credit checks in your budget. That way, you can screen out problem renters and only accept high-quality tenants. Remember that you’re responsible for the property as soon as you have renters. You’ll need to start incurring expenditures, such as repairs. Some jurisdictions allow renters to withhold their rent payments if you don’t fix faulty utilities promptly.
2. A Return on Investment (ROI) Is Possible. To calculate your return on investment (ROI) from a potential real estate investment, begin by estimating the yearly profit you could make from renting the property. To do this, research average monthly rents for similar properties in your area, then multiply this number by 12 to estimate yearly revenue. First, estimate your yearly future rental revenue to calculate your net operating profit. Annual rental estimates minus operational expenditures equal net operating income. Your running expenditures are the sum of all the money it takes to keep your property in good condition. This includes insurance, property taxes, upkeep, and homeowners association dues. You should not involve mortgage and interest payments. You can determine your return on investment (ROI) by dividing your net operating income by the entire amount owed on your mortgage.
3. You’ve Got Time to Deal With It. A lot of work goes into renting out an investment property, like advertising, interviewing potential tenants, screening them, collecting rent, maintaining the property, and making repairs when something goes wrong. You also have to take your tenant’s “right to privacy” into consideration, which is a legal criterion that usually requires you to give them at least 24 hours’ notice before you show up.

Investment Property Loans: What You Need To Do Before Applying

Regarding investment properties, mortgages and loans are a bit more complicated than those for personal residences, such as non-owner-occupied mortgages.

Requirements for Investment Property Loans

Mortgage lenders are usually more lenient regarding loans for primary residences than investment properties. For an investment property, you’ll likely need a down payment of at least 15% and a credit score of 680.

If you’re applying for a loan, your credit score should be at least 620. A 620 credit score and 25% down payment are typically required for two- to four-unit investment homes.

The Bottom Line

To be a successful landlord, you must be prepared to do your due diligence. This includes ensuring your property is ready to be rented, screening potential renters, and verifying the information they provide.

If you’re not interested in the long-term commitment, you can always lease your home and enjoy a regular income stream.

When you’re ready to purchase an investment property, contact Misty Garrison of Mortgages by Misty at (480) 618-5358, a trusted home loan expert. Let us help you find the best financing option for your situation!