Owning an investment property is an excellent way to earn passive income, which comes in handy when saving for financial goals. The money earned from a property can build your emergency or retirement fund, pay off debt and even supplement your income. But as a first-time investor, there’s definitely a learning curve.
To make sure your first experience is a positive one, here are a few tips for buying an investment property.
1. Purchase the Property with a Mortgage
Getting a mortgage for an investment property is sometimes more complicated than getting a mortgage for a primary residence. So if you have money saved, you might be tempted to purchase an investment property with cash. This way, you don’t have to worry about down payments, credit scores, appraisals, or closing costs. But while a cash purchase might be faster and simpler, never drain your savings on a purchase.
Even if you buy a property in relatively good condition, you’ll eventually need money for repairs, upgrades, cosmetic tweaks and maintenance. If you don’t have cash for the property’s upkeep, you might finance these projects with a high-interest credit card and dig yourself into a hole.
Using a mortgage to leverage the property keeps your cash liquid, providing you with resources to handle the unexpected.
2. Prepare for a Larger Down Payment
If you’re using a mortgage to purchase an investment property, make sure you prepare for a larger down payment.
You can use a conventional loan to purchase an investment property. Just know that getting approved will likely require a down payment between 15% and 20%. In addition, you might be required to have a cash reserve of at least several months of mortgage payments.
One option for drumming up the down payment is getting a home equity line of credit or a home equity loan on your primary residence. Only do so, though, if you’re able to afford the monthly payment on a second mortgage. Failure to repay a home equity loan or a home equity line of credit could result in foreclosure of your primary residence.
3. Buy a Single-Family Home as Your First Investment
Some first-time investors are lured by multi-family homes which can provide more rental income. What some fail to realize, however, is that multiple units can mean double, triple or quadruple the work.
With a single-family home, you’re only dealing with one tenant and only a few appliances. So it’s a great property for getting your feet wet. Once you’re comfortable being a landlord, then progress to multi-family homes.
4. Find a Turnkey Property
As a first-time investor, it can be overwhelming coordinating a major renovation, coming up with a strategy to improve cash flow, and locating a suitable tenant.
To make it easier on yourself, look for turnkey properties that don’t need immediate repairs or renovating, and that comes with an existing tenant or property management company. A good property will also have positive cash flow, allowing you to walk into the investment earning money.
5. Live in a Purchased Multi-Unit Home
If you’re adamant about buying a multi-family home, start small with a two-unit property and live in one of the units. Since this property also serves as your primary residence, there’s the option of using an FHA home loan for financing, which only requires a 3.5% down payment.
Ready to start investing? Let our team of loan experts help you find the right mortgage to purchase your first investment property.
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