As the economy improves and mortgage rates are still low, some people may be considering purchasing an investment home to supplement their income and real estate portfolio. While it is a great time to buy, becoming a landlord is a huge investment. Before you jump into this purchase, take some time to think about the whole process:
- Do your research.¹
If you are using a mortgage to purchase your investment property, do the research on the loans available to you first. For example, your interest rate will likely be higher and you’ll need a larger deposit than if you were planning to live in the home. Once you have that number, make sure you know how much comparable rentals actually are rented for in the area of your potential property, because it should be well above what you will need to pay for the mortgage.²
- Consider your lifestyle.
Are you comfortable fixing the small issues in your home? If you purchase a rental home, hiring a contractor for every incident or for all repairs between tenants will raise your average expenses and cut into your bottom line.¹
- Do the math.
Before delving into this, estimate what your monthly expenses will be. You’ve got to include landlord’s insurance and maintenance cost in addition to the normal fees like mortgage and taxes. You can estimate your maintenance cost at 1% of the home’s value annually. You want your returns to be high to ensure you make money at the end of the year – Investopedia recommends setting a goal of 10% returns.¹
- Find the right location.
It’s important to look at the home’s location as a renter would. How safe is the neighborhood? What is the school district like? This not only will get more interested renters, but potentially get you a higher monthly rent.¹
- Buy with equity.²
Before you buy, make sure you’ve got equity built into the property. When you purchase, the dollar amount isn’t the only factor. The extra equity can be helpful in the future for profit margins, or as a cushion should you need to alter your plans.
Being a landlord is an excellent opportunity if you hope to grow your income, but like all businesses, there are startup fees that need to be taken into consideration. If you are planning on buying your first investment property, reach out to your Legal Resources Plan Law Firm for the closing. If you’ve already purchased your investment home, your Plan Law Firm can still help review your lease and advise you of the steps you need to take to protect yourself and your property as a landlord.