Guide to Buying Your First Investment Property
The stock market is hot, interest rates are low, and you are finally ready to buy your first investment property so what’s next? Of course, you always want to get preapproved before you start shopping for properties. Wanna know how to buy your first investment property? Here are 5 ways to put yourself in the right position to get preapproved for your first investment property.
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1. Save your money!
You are going to need between 20-25% for a down payment. If you are looking to buy a single-family property as a rental, the minimum down payment is 20%. If you want to buy 2 or more units, you will need 25% of the purchase price. This is the down payment and of course, there are closing costs involved when buying any property. Most people want to escrow their property taxes and insurance.
There is seller’s assistance allowed for investment properties but that is something that rarely is given as the seller assumes if you have the money to buy an investment property you likely won’t need any extra assistance.
2. Decide if you want to buy it in your personal name or in an LLC.
There are pros and cons to each. When you buy a property in your personal name, you can take advantage of lower interest rates but keep in mind that Fannie Mae and Freddie Mac will only allow a person to have up to 10 properties in your personal name so once you get to that point, you will have to switch over to buying them in a business name.
Also, if you buy the property in your personal name, you will have to qualify based on the debt-to-income ratio. This means that your income must support the other monthly debt obligations you have in addition to the new mortgage. If you decide to buy in an LLC, the mortgage won’t show up on your credit report and we don’t have to use a debt-to-income ratio. We use a credit score and the market rent based on the appraisal to get you qualified.
One thing to keep in mind is that the rent needs to cover the mortgage payment at a minimum. Obviously, if the rents are higher that is fine, but they can’t be lower than the mortgage payment or the lender won’t approve the loan.
3. Who will manage the property?
When you own an investment property, you can either choose to self-manage or hire a property manager. Lenders won’t make you hire a property manager, but it is something that you would want to consider. If you decide to do it yourself, keep in mind that you are responsible for screening tenants, collecting rent checks, paying the mortgage on time, and managing the property. If something breaks, the tenant will be calling you to fix it.
Depending on how the lease is written, you will most likely be responsible for repairing any if not all issues. If you are a self-learner and can fix things on your own, you can save a lot of money especially for plumbing, electrical, and HVAC work. Otherwise, you will want to have these individuals on your speed dial that way if there is an emergency, you won’t have to scramble trying to find someone you trust.
If you decide to hire a property manager, they will manage the tenant, collect the rent, and manage the issues. They will call you to verify you are willing to pay for certain repairs, but you often won’t have to manage the process.
4. Do your research!
It’s important to do research on the area that you want to buy your investment property. Check out the local rents and see if there is demand for rents in the area where you want to buy. You may find cheap property in a certain area which may be a good purchase for you, but you’ll want to figure out what an appropriate rent will be and if there is demand.
Is the area growing with new businesses? Are people relocating to your area? Over the past 18 months, many people were moving out of the cities and moving to more rural areas as their jobs went remote. This allowed for a lower cost of living and ultimately created more demand in areas that otherwise haven’t grown. You can check out other rentals listed in the area to find out what the demand is and what their rents are paying.
Also, there are plenty of social media groups that you can gather advice from other local investors.
5. Make a list of expenses.
Once you start shopping for a property and you find one that you will want to make an offer on, make a list of expenses that will be needed for the year. This will be important because you want to make sure that the property you buy will be profitable. If there are a lot of repairs that need to be done upfront, you will want to factor that into the cash flow. You also will want to decide what utilities you will pay vs what you will ask the tenant to pay.
Once you are under contract, lenders may ask you for the cash flow of the property and so it will be great for you to provide this to them.
Buying an investment property can be overwhelming but taking these steps upfront can help you be a smarter investor and make the process go smoother. We’re happy to help with any other questions regarding investment properties so give us a call!