• Buying an investment property is attractive to some because it offers a way to generate passive income.
  • However, it is expensive to start and your property will continue to cost you money over time.
  • The first step: find out if you want to flip the house, rent it out, or help sellers find buyers for their properties.
  • Learn more about personal finance coverage.

At best, buying an investment property is an important step towards generating passive income. However, in order to set yourself up for success, it’s important to make sure you’re ready to take the plunge.

With that in mind, we asked industry experts to share how they know when someone is ready to buy an investment property. Here’s what they had to say:

1. Your investment goals are clear

Did you know that there are several ways to invest in real estate? Tolani Onigbanjo, the owner of We Buy North Jersey Homesa rehabilitation and rental company, reminds potential investors that they should have a clear investment strategy in mind before preparing to make a purchase.

“There are several different real estate investment strategies, from fix-and-flip to buy-and-hold to wholesale,” Onigbanjo says. “Do your research and choose the strategy that best aligns with the rest of your financial goals.”

With a “fix-and-flip” strategy, you would buy a house, renovate it, and quickly resell it for a profit. With a “buy and hold” strategy, you would keep the property in your portfolio for the long term and rent it out. With wholesale, you would contract with sellers to help them find a buyer for their property.

Ultimately, the investment strategy you choose will have an effect on the type of property you will be looking to buy, which is why it’s important to clarify your goals before you begin the buying process.

2. You have a decent amount of savings

Unfortunately, unlike a primary residence, there’s no such thing as buying an investment property with little to no money down. Since government-backed loan programs (like the FHA) are generally not available for investment properties, you need to have some savings in the bank.

In reality, Elias Papadopoulosa RE/MAX Unlimited agent in Brookline, Massachusetts, suggests saving up to 30% to 35% of your expected purchase price.

“Most banks want 20% down payment and up to three months [of expenses in savings]“, said Papadopoulos. Also, you should have some [savings] rest for repairs so units are ready for occupancy. »

Lenders look at how much liquid assets you will have left after paying your down payment and closing costs to make sure you’ll still be able to make your mortgage payments, even if something unexpected happens to you. regular paycheck.

While lenders expect their borrowers to have a certain number of months of reserves after each transaction, the requirements are often stricter for investors.

3. You understand how to run the numbers

At its core, buying an investment property should be a mathematical decision. Before entering the market, potential investors should understand what parameters they need to consider.

“Fortunately, most single-family homes have predictable cash flow,” says Andrew Helling, Nebraska licensed real estate agent and owner of REthority.com. “There are many rules of thumb that investors can use to help clarify the buying process.”

He offered the following as some of his favorites:

  • Rule of 72: Dividing 72 by a fixed annual rate of return determines how quickly you will recover your investment.
  • 1% rule: If you can rent your property for 1% of the purchase price, you should be able to make your mortgage payments using the rental proceeds.
  • 50% rule: On average, half of the gross rental income of a single-family home will be spent on operating expenses, such as taxes, insurance, vacancy, turnover and maintenance costs.

4. You are ready to take on additional responsibilities

“Ownership is a massive commitment,” advises David Reyes, financial advisor and chief financial architect at Financial Architecture Reyes in San Diego, California. “If you are ready and have the time to find qualified tenants, as well as take care of the maintenance associated with owning the property, then you are ready to buy it.”

Even if your goal is to repair and flip a house, you will still have additional responsibilities on your hands. In this case, your responsibilities will include balancing budgets, overseeing contractors, and managing schedules.

However, in either case, it’s important to remember that with the passive income that comes with buying an investment property, it also comes with some extra work. Make sure you are ready to undertake this work before proceeding with your purchase.

5. You have assembled a team of skilled professionals

“As an investor, you need to make sure you have a good, reliable team covering real estate, loans, maintenance, repair contractors and even housekeeping,” says real estate agent Patrick Fogarty of Hilton & Hyland in Los Angeles.

“You need a team of professionals who can guide you through the buying process,” he continues. “When you’re a homeowner and something goes wrong on a night or a weekend, you’ll want to have a relationship with the right contractors who will give you priority and make an emergency visit to fix the problem.”

Be sure to do your research when you start building your team. Read reviews online and ask family and friends for recommendations. You will want to find a lender and a real estate agent in addition to the maintenance and repair professionals described above.