How to purchase an investment property

You will discover numerous of pluses to owning rental real estate: diversifying from the usual investments of stocks and bonds; offering an optional stream of revenue; and generating a potentially scalable business. But there can be challenges, that come with an investment property too – you will need capital, a time commitment and dealing with tenants.

How to purchase an investment property

“Real estate investing is not for the faint of heart,” said Robert Dolan, owner of mortgage broker Capital Financial Group in Winnetka, Ill.

Real estate experts said individuals who would like to get into the world of owning rental property really should take into consideration a few factors.

Do the research. Homeowners know each piece of property is different, and valuesare vastly different depending on neighborhoods. That’s a great deal more so when examining investment property, so closely review rents at comparable properties.

“If I’m looking at 2,500-square-foot condos, I need to know what do they rent for, and what do similar positioned condos sell for. Have they been renovated to get what may be a premium in rent, and am I going to have to renovate the property I’m considering to get that rent? Make sure you consider apples-to-apples when you do comparables. Otherwise you can end up with less free-cash flow or rent that could end up blowing up your deal,” said Jared Snider, senior wealth adviser at Exencial Wealth Advisors in Oklahoma City, who has also practiced real estate law.

At the very least, the rent has got to cover the owner’s principal, interest, insurance, real-estate taxes, and if it’s a condominium, the monthly association fee, Dolan said.

Dolan and Snider said investors considering condominiums should know what limits the association could have on rental properties, as some buildings want to maintain a balance between the total number of units are rentals as well as how many are owner-occupied.

It may cost more. Those who have to finance their purchase must-have a minimum of 20% down, with 25% preferred, Dolan said. Fannie Mae,one of the main options for financing for mortgage lenders, allows borrowers to finance purchasing as many as four units as a residential purchase, he said. Anything above that is considered commercial real estate, he added.

Investment-property mortgages tend to be costlier overall seeing as there are more risks involved. Plus there are the typical fees that go with any real-estate transaction – origination fees, title fees and attorney fees. Securing mortgage financing approval prior to finding the desired property assists with negotiations, Dolan said.

Snider said new landlords frequently have a difficult time accounting for what all the costs will look like, which explains why spending some time creating a line-item budget for any property is important, as is having access to funds to cover unexpected costs.

Sometimes property might have to have improvements before tenants move in, Dolan said.

“You want to make sure you have sufficient cash on hand. There are times you might have elevated expenses, and you don’t want to put too much of a cash crunch on your personal cash flows,” he said.

It’s a time commitment. Snider said potential landlords should understand that it requires time to care for the physical needs of the property and time to recoup the cost, which is the very first thing he tells potential investors.

“A lot of folks who are buying a condo to rent out think of the phrase ‘passive investment,’ but it’s not. When you’re a landlord, that’s definitely not passive, even if you hire a management company” to take care of the property, he said.

Landlords really should care for building maintenance and address issues tenantscould have that can’t be put off, he said.

Ideally, landlords should look at the investment using a long-term focus, they said. Although some housing markets become “hot,”they never stay that way since their values have a tendency to run in cycles.

“Whenever you invest in real estate, you build wealth through rents and build value through the property appreciating. Generally, the property will appreciate over 10 to 20 years in line with inflation,” Snider said.

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