Learn How to Buy Your First Investment Property

Mar 31, 2022

Investing in real estate is an effective way to earn passive income and generate equity in the long term. However, as with any investment, it is important to understand what you’re getting into before putting your hard-earned money on the line. Over the years, real estate has proved to be a profitable investment to those who have done it right – which is why Starboard has assembled the following tips and resources to help you do the same.

Create a Financial Plan

You will need sound financial planning when looking to afford and maintain an investment property. To purchase the property, consider using a combination of savings and loans. In the case of the latter, carefully review the stipulations in your Loan Estimate to avoid any surprises.

When it comes to approving mortgages for investment properties, banks take a conservative approach, scrutinizing your ability to afford the property and make timely mortgage payments. The process can become more difficult if you are still paying a mortgage on your current property. A good alternative to a traditional mortgage is a home equity loan. However, to be eligible you will need to have paid off a substantial part of your mortgage and built equity on your primary home.

When calculating your margins, use the 1% rule which states that you should aim to charge rent no less than the amount equal to 1% of your property’s value. Use this figure to look for lenders who will provide you with monthly payments less than that amount.

Focus on Location

Choosing the correct location is crucial to making your investment property profitable. While your first thought would be to buy a home in a prominent urban area to earn high rent, it will also involve higher expenses in terms of maintenance costs and property taxes.

Your budget also plays a big role in choosing the location. Remember to take into account additional expenses such as repairs, modifications, and monthly upkeep costs. Additionally, here are a few other essentials to consider when deciding on the location:

  • Low crime rate
  • High employment rate (at least above 50%)
  • Proximity to schools, colleges, office centers, and recreational amenities
  • An appreciating house market in the next five years
  • Low number of vacant properties

When it comes to finding the right tenants, working with a reputable, experienced company like Starboard is always your best bet.

Work with A Property Manager

Maintaining a rental property demands a considerable amount of time and effort. If your work or personal obligations prevent you from giving the appropriate amount of attention to your property, consider hiring a property manager. A skilled property manager can handle a plethora of responsibilities such as:

  • Listing your property on the market and connecting with buyers
  • Helping you set appropriate rent to cover expenses while receiving ample offers
  • Handling rent collection and moderating disputes
  • Handling repairs and modifications needed for the property

Having a property manager makes it easier to purchase a property away from home, as it will considerably reduce the need for you to travel and dedicate time towards the above-mentioned activities. However, you should expect to pay 8-12% of your monthly rent towards their services.

Invest in Necessary Renovations

Depending on your property, seek to make renovations that can increase property value and make your space appealing to renters. One of the simplest renovations which gives the best ROI is adding a fresh coat of paint as it instantly gives your property a new look. However, if you plan to make your home more functional, a basement renovation is the go-to option. Consider converting your basement into an entertainment room, personal gym, or a home office.

An investment property can provide fantastic long-term returns, but only if approached in the right manner. So take your time choosing the perfect property, creating a sound financial plan, and making the necessary modifications.

As the largest, independently-owned commercial real estate firm in San Francisco, Starboard offers clients the highest level of local expertise with a global reach. Call 415-765-6900.

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Written by: Marcus Lansky