Buying your first investment property can seem intimidating off the bat, but preparation cures all jitters. To help you prepare, we asked a group of financial and real estate experts their thoughts on investment properties, and what they think all first time home investors need to know.
1. Decide on the Best Area
There are endless factors to consider when choosing an area to purchase your investment property, and I would encourage you to be willing to look a little further out from where you live, if necessary. Drive through the neighborhood at various times of the day (middle of the night, rush hour, etc..) and see what it’s like. Is there terrible traffic? What type of people area around? Is it loud at night? Also, look into any rentals in the area and see what they rent for an how often they’re rented, as well as the crime rate, etc. for the area.
-Will Johnson, Realtor, Sell and Stage
2. Understand Risk-Adjusted Returns
The promise of a 20% return is great, but at what risk? I worry more about protecting against downside scenarios than focusing on the potential upside. Investments in preferred positions, i.e. the middle of the capital stack, typically earn close to equity returns (12-16%) but with a larger margin of safety than equity.
-Ben Miller, Co-founder & CEO, Fundrise
3. Budget Enough Money for Maintenance & Capital Expenditures
I work in a market where owning a property that is 80+ years old is the norm. In fact, I’d be hard-pressed to find a small multifamily in Manchester, NH that was built in the last ten years! Whenever I advise my clients concerning an investment property, I always tell them to budget a significant percentage towards maintenance expenses to maintain the property in its current condition, and budget a smaller percentage towards capital expenditures to improve the condition of the property over time.
-Matthew Lefebvre, The Hvizda Team, Keller Williams Realty Metropolitan
4. Be Ready
One of the most basic tips for real estate investors is to be ready. If you’re financing, get pre-approved for a mortgage. You want to be ready to strike when you find the right investment opportunity.
-Brad Pauly, Broker/Owner, Pauly Presley Realty
5. Know Your Limits
I always tell people who are interested in getting into investment real estate to consider how comfortable they are with doing any kind of repairs or construction to a house or rental property. If you aren’t comfortable with it (or getting repair calls in the middle of the night), then you’ll have to budget in the costs of contractors, professional property managers, etc. Be honest with yourself up front, so that you don’t get into a situation where you are overwhelmed with projects — and mounting debt.
-Michael Park, President of Renters Warehouse Dallas
6. Keep Cash On Hand
Maintaining a cash position is critical, especially for beginning investors. Unexpected costs can often pop-up and tenants do not always pay rent. When you have to make your mortgage payment at the end of the month having a cash reserve can often mean the difference between having a successful investment and foreclosure.
-Kyle Farrah, Interactive Shares
7. Choose Your Tenants Wisely
Don’t simply rely on pay-stubs, verify with their employer. Never skip the credit check and nationwide criminal background check, local police records are no good when people move around. No matter what you do, always verify landlord history. Make sure you are talking to the owner of the property by checking property records, as applicants will sometimes give you the number of a friend or family member who claims to be their landlord.
Jennifer Ruelens, Vice President, Fish Property Management