[fa icon="calendar"] 08.04.2016 / by Rory Williams
Buying an investment property is all about increasing wealth and achieving financial security. However, this does not mean that property investing always brings a positive return. You’ll need to figure how to properly manage your investment property before you can reach your financial goals. Here are six tips for first time property investors:
1. Choose the Right Property
Make sure you choose a property that is right for you. How well do you know your way around a toolbox? If you buy a property that required lots of repairs and you have to hire one or more contractors to get the job done, this is going to eat into your profits. Most property owners do their own repairs, so if you aren’t handy with tools or don’t have the extra cash to hire a contractor, you may want to reconsider your purchase.
2. Have a Sizable Down Payment
Investment properties usually require a much larger down payment than owner-occupied buildings and have stricter approval requirements. Also, mortgage insurance doesn’t cover investment properties, so you’ll need to put down at least 20 percent to secure financing. If you can put down 25 or 30 percent, you may qualify for an even better interest rate.
3. Stay Away From Big Banks
If you can’t afford the 20 percent down payment, consider going to a local bank for financing, rather than a large, national bank. Local banks will have a little more flexibility and may know the market better and be more willing to invest locally.
4. Watch out for High Interest Rates
Interest rates on investment properties are much higher than on owner-occupied buildings so you’ll need to be sure you are getting an interest rate that will not eat too far into your monthly profit margins.
Although many factors can influence the terms of a loan for an investment property, your credit score may be the most important. A score below 740 means you’ll have to pay an additional fee to keep the same interest rate, or pay a higher rate altogether.
5. Determine Your Operating Expenses
Operating expenses can take up anywhere between 50 to 80 percent of your total income. This means that if you are collecting $1,500 for rent, you can expect anywhere from $600 to $1200 of that to go toward operating expenses such as maintenance costs, property taxes, cleaning services, security, etc. If you are not sure what your operating expenses will be, plan on spending around 60 percent of your monthly income.
6. Hire a Property Manager
A property manager can help keep things organized for both you and your tenants. Hiring a good, experienced property manager can help you get the most value from your property by giving you advice on property law, how to handle maintenance issues, when to review pricing, and more. A property manager can also help you find the right tenants and ensure that rent is paid on time.Unlike buying shares of a company where the value is transparent, real estate can be more difficult to price. Keep your expectations realistic and know that your investment will not bring you a large paycheck right off the bat. These tips can help you manage your investment and reach your long term financial goals.