Are you ready to leap into the world of investment property ownership? An investment property is one of the largest assets you will probably ever buy. With enough effort, funds and the right people around you, this can be an excellent way to generate passive income.
Many people like the idea of owning an investment property, without understanding all of the in's and out's it comes with and what it takes to find the right investment. In this blog, we'll discuss what you'll need to know when purchasing your first investment property along with some of the challenges that you may encounter.
Obtaining a Mortgage
Whether you're looking to purchase a primary residence or an investment property, one of the first questions most people ask is, "How much can I afford?" Using a mortgage calculator to get an idea of rates and payments will get you headed in the right direction. Next, you will need to be preapproved for the amount you qualify for. Make it clear to the loan expert that you are buying an investment property.
Getting preapproved first allows you to jump on an opportunity at a moment's notice. For example, if you find a perfect deal, but you're not preapproved, someone who is preapproved can get the home under contract before you do. Also, if you aren't preapproved, you might find the home of your dreams only to discover you don't qualify for it. Getting preapproved helps you stay on-track and take advantage of the best deals.
Credit Score Requirements
The minimum credit score requirement on a single-unit investment property is 620 and it will require a 20% down payment. If you have a credit score of 720 or higher, you're only required to put down 15%.
For an adjustable-rate mortgage, the minimum credit score of 620 requires a 15% down payment on a single-family property.
It's important to communicate with your loan expert to clarify any confusion about what you do and don't qualify for.
Other requirements include two years of tax returns, two years of W-2s and two months of bank statements to your mortgage company. Think of it as the 2/2/2 rule. Your mortgage company will also want six months of mortgage payments in reserve in the event of financial hardship.
Determining The Potential ROI
The ROI can be calculated by first finding the net annual income of the property (rent money left over after taxes, insurance, fees, HOA, repairs, etc.). Take the net annual income and divide it by the amount you spend on the property.
Example: Net Annual Income is $8,000 / $100,000 You Spent = 8% ROI
This is a good way to determine which investment property meets your financial expectations.
What Makes a Good Investment Property
If you're scouting the area for a perfect rental property, look for a home with low maintenance and minimal vacancies.
Unless you have extensive handyman skills or have completed meticulous planning about a fixer-upper, we strongly suggest you stray from this "opportunity". This will help prevent your investment from becoming a money pit.
If your property is vacant, it isn't much of an investment... is it? But this doesn't mean open your home up to any potential tenant. Make your property attractive to GOOD tenants. One's that will pay rent on time and take care of the home. To do this, you can put specific lease agreements in the contract that a quality tenant won't have a problem signing.
Reed Property Management
When you pile all of the aforementioned tasks listed above on top of everyday life, it can become quite overwhelming. At Reed Property Management, we have the connections and experience to help you find an investment home. We will maximize the ROI of your home by performing background checks on potential tenants, property inspections to ensure your investment is being maintained, mortgage and utility payments, rent collection and much more.