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With home values taking off, there’s never been a better time to invest in real estate. However, if you’re a first-time investor, don’t expect that buying an investment property will be as simple as buying your first house. Purchasing investment properties is trickier than primary residences when it comes to financing, insurance, profitability and safety.
Black Wall Street Pennsylvania explores some key points to help you frame your plan.
Financing an Investment Property
Cash is the best way to pay for investment properties, but as a first-time investor, you may not have the reserves to pay for real property. In that case, you’ll have to qualify for a loan such as:
A conventional mortgage: It’s possible to use conventional financing for investment properties, but lenders have stricter requirements for investors versus primary homeowners. Your lender may consider expected rental income, but without landlord history, your income will be the primary basis for qualification. To forecast income, Landlord Tips suggests averaging general expenses and estimating rent.
Examine comparable properties, looking at the vacancy rates to tell you how often and for what duration units are empty, and what price properties are able to charge.
Asset-based loans: Asset-based loans are another option for long-term real estate financing. Unlike mortgages, asset-based loans don’t consider your income. Instead, the property’s cash flow is used to determine eligibility.
Home equity loans: Some investors tap into their primary residence’s equity to buy, but this is a risky move. Using a home equity loan or HELOC means your home is at risk if the investment doesn’t work out.
FHA and VA loans: FHA and VA loans typically can’t be used to buy rental properties, but there’s one exception. Commonly known as house hacking, buyers can use an FHA loan to buy a multifamily home with up to four units. As long as you occupy one unit, the home is considered your primary residence for lending purposes.
Flip-Worthy Properties
Television shows would have us believe flipping property is as simple as buying a fixer-upper, bringing things up to speed and then putting the place on the market. First of all, rehabbing houses is often a pretty involved process. What’s more, while elbow grease can go a long way towards that end goal, a critical factor is the estimated resale value.
Insuring a Rental Property
If you intend to rent out an investment property as a short- or long-term rental rather than flip it, you’ll also need to buy insurance coverage. Rental property insurance is different from standard homeowner’s insurance. Also known as landlord insurance, Allstate explains these policies cover property damage, liability, and lost rental income. Expect to pay 15-20% more for landlord insurance than you would for homeowner’s insurance, more if you run a short-term rental.
Protections and Profits
Investors can save money on landlord insurance by searching for companies that offer discounts for security upgrades. Home security is a smart move for investors anyway; when you don’t see a property every day, you need other ways to keep it safe. However, due to restrictions on security cameras in rental properties, owners have to get creative to keep their properties safe. Don’t underestimate the impact of low-tech security like fences, motion-activated lighting, and thorny bushes below first-floor windows.
Another type of security you should consider is that of personal asset protection. As an investment property owner, you could easily be targeted by lawsuits. With that in mind, consider the protection an LLC provides. An LLC safeguards personal assets, plus there are tax advantages and if you decide to expand it can grow with you. Zen Business details some LLC examples and more information about the process of registering. You can even purchase properties through your LLC.
Buying your first investment property can be intimidating — especially when it comes to the financials. However, investors who navigate these challenges have a lot to gain. Real estate has long been a safe investment, and with both home values and rents on the rise, investors who buy today and manage their properties well can count on strong returns.
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