Owning investment property can be a great way to generate additional income – or even to make a full-time living. But before diving in, it is important to know just how much investment property you are able to purchase.
There are several different financial “components” to take into consideration when you are determining what you can own. These include the following:
- Down Payment – One of the biggest initial costs that you will have is the down payment. When purchasing a primary residence, you can oftentimes get by with anywhere from 3% to 20% (or more), depending on how you plan to go about financing the property. But with investment property, the amount of the down payment can generally be more. In this case, the figure could range between 25% and 35%, or even more, depending on your credit, and how you go about borrowing the funds. Many real estate investors may be able to work out more creative financing, such as financing through the current owner or working with a private lender.
- Closing Costs – When borrowing money for a property purchase, you will also need to consider the amount of closing costs. These, too, can differ, based on the amount of money you are borrowing, as well as a number of other factors, such as your loan origination fees (if any), the cost of a title search, title insurance, an appraisal, and other miscellaneous expenses.
- Property Taxes – The amount of property tax can be a key factor in whether or not your investment is ultimately profitable. Prior to purchasing a property, you can check with the local tax assessor’s office in order to find out how much the taxes on the property have been in the past. While the amount that you will owe here will likely differ, past tax figures can at least provide you with a ballpark number to anticipate.
- Insurance – When owning investment real estate, you will need to insure your property. Insurance coverage can essentially protect your investment if there are various damages, as well as provide you with at least some amount of reimbursement in the case of theft. Typically, lenders will not allow you to obtain a mortgage unless you can provide proof of property insurance.
- Needed Repairs – While an investment property may be offered at an affordable price, if there are any major repairs or renovations that must be completed before you can rent it to tenants, this could also hinder your potential profitability.
- Ongoing Maintenance – There is also ongoing maintenance to contend with. This could include basic items such as lawn care, as well as the repair or replacement of the HVAC, roof, appliances, and a long list of other items.
- Emergency / Unexpected Expenses – You should factor in potential emergency or unexpected expenses, too. By having a financial cushion in place, if an emergency comes up, you won’t have to put these costs (or at least all of these costs) on credit.
In addition to a property being affordable financially, real estate investors also need to consider the amount of time that managing a rental property can take. Depending on the number of units you own, you may find yourself spending many hours on your investments.
By working with a property manager, though, you can free up a considerable amount of time by designating the maintenance and management of the property and tenants to someone else. For more information on how hiring a property manager can be in your best interest, Contact Us.