How to buy investment property
Now that you know some of the main types of investment property, how can you start buying one? There are a few things you need to consider when financing your first real estate investment, so let’s get back to them now.
Secured financing and investment real estate loan
One of the first steps in investing in a property is obtaining financing to purchase it. Depending on the type of property you choose to invest in, the way you go about it might seem a little different. If you’re investing in residential real estate, you might just get pre-approval from a lender for a mortgage. Whereas, if you are looking to invest in an industrial building, crowdfunding the property with a group of investors might make more sense.
Lenders take additional risk when lending to investors rather than borrowers financing a primary residence. Higher risk means higher interest rates and down payment requirements, which is important to keep in mind when considering your budget for an investment.
Choose your location on where to invest in the property
Regardless of the type of investment, location is an extremely important factor to consider when investing in real estate. If your property is located in a location where it will be in high demand, you are more likely to make additional profit on your investment. Commercial property in a prime location will attract businesses, and residential property in a popular area will attract tenants.
If you’re having trouble choosing a location, it may be helpful to hire a real estate agent. Realtors tend to be very knowledgeable about the areas they work in and can probably provide good advice on high demand locations.
Work with real estate professionals
In addition to helping you choose a good location to invest, real estate professionals can also help you with many other steps in the investment process. Investment-friendly real estate agents and other professionals such as lawyers, contractors, inspectors and property managers can help you with various investment-related tasks. These include locating potentially profitable properties, advising you on investment choices, and advising you on specific investor tax benefits you may be entitled to.
Calculate cash back and return on investment
Before purchasing an investment property, it is a good idea to consider what the return on investment (ROI) or profitability of the property will be. Calculating the potential return on investment can help you assess whether it would be wise to invest in a particular property. The ROI formula is as follows:
ROI = (gain on investment – investment cost) / (investment cost)
So, for example, if you spent $ 80,000 for a repairman in the upper part and think that you can sell it after the turnaround for $ 135,000, the formula would look like this:
ROI = ($ 135,000 – $ 80,000) / ($ 80,000)
In this case, the return on investment would be around 0.69, or 69%. However, return on investment can be tricky with rental properties, as many variables and costs associated with maintaining the property are not factored into the return on investment formula. As an alternative, you can also calculate the cash back or cash on cash that you can expect from your real estate investment.
Cash return measures how much of your investment you will get back each year. Where ROI measures your total ROI, Cash Back simply measures returns based on what you spent out of pocket on the investment. The formula for calculating the cash return is as follows:
Cash Back = ((annual income – annual expenses) / (initial cash investment) x 100%)
So if your income is $ 200,000, all of your annual expenses are $ 155,000, and your initial cash investment on a property is about $ 175,000, the formula would look like this:
Cash Back = (($ 200,000 – $ 155,000) / ($ 175,000) x 100%)
Your cash back percentage in this case would be around 0.26 or a 26% return. What constitutes a “good” percentage return is relative to the investor. It all depends on your personal financial goals and what you hope to earn.