A Beginner’s Guide on Preparing to Buy Your First Investment Property
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The following is a guest column written by Katie Conroy. Katie is the creator of Advice Mine. She enjoys writing about lifestyle topics and created the website to share advice she has learned through experience, education and research.
Vacation homes are a hot commodity across the country, and even many young adults are opting to invest in rental properties before buying a home to live in. This can be a prudent move, as purchasing a vacation home has many benefits. For one, you still gain equity, but you also have the added perk of bringing in money to offset your monthly mortgage. Perhaps most appealing, however, is that buying a house in your preferred vacation destination when you’re younger means it should be paid off by the time you retire.
Here are a few tips on how to invest in vacation and other rental properties, whether you are already a homeowner or not.
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Get up close and personal with your finances.
Dreaming about owning a rental home or vacation condo is one thing, but you also have to face reality before you start the process. This means you’ll need to take a close look at your financial situation. Lee Nelson from My Mortgage Insider explains that the vast majority of second-home buyers finance less than 70 percent of the purchase price, with a whopping 29 percent paying in cash. This does not mean that you cannot buy a second (or first) home unless you have hundreds of thousands of dollars in the bank. You will likely need to put at least 20 percent down, though, and can’t apply for an FHA or VA loan. Unless you are paying in full, you’ll have to have the credit and down payment for a conventional loan, which Experian explains is a bit more difficult to obtain than government-backed financing.
Don’t take shortcuts.
Once you have decided on the area and have your budget set, it’s time to start looking for properties. The most important thing you can do now is partner with an experienced realtor. Make sure this individual is current on market trends in your target area, such as if you want something within the city or on the outskirts. When you find the right property, remember that this is a business decision. Despite your excitement, it pays to keep your cool and continue as though your income depends on it – because it does. Do not take shortcuts and do invest in a home inspection. You’ll also want to bring in any professionals, such as a foundation specialist or HVAC technician, if your inspection points to potential problems with any of the home’s features or systems.
Determine your role.
Finally, when your apartment, condo, townhome, or house is in your name, it’s time to make even more decisions. You have to determine how much money you plan to put into the property as well as how much rent (or nightly rental rate) you can charge. Running a rental business, even if you only have one property, takes lots of work. You may be better off partnering with a property management service or rental agency until you learn the ropes.
These tips only skim the surface of becoming a real estate investor. However, they can help you identify other areas that need your attention. Remember, your real estate agent is a valuable source of advice and support, and can point you in the right direction if you need help with any part of the process. Fortunately, after a few months of experience, you’ll likely get the hang of it, and may be ready to seek out additional income-producing properties and start the process all over again.