There are around 20 million rental properties in the U.S., and about 14 million of those are owned by individual investors. Might you join their ranks? Here are a few things to consider.
Know That You’re Ready
Financially ready. Lenders often want at least 15% down on investment properties and you’ll need to have money ready for any initial or emergency maintenance and repairs, plus costs such as landlord insurance, advertising for tenants, and credit checks. Understand that it might take some time to get the first tenant moved in, so be prepared to handle those initial expenses without a rent check coming in.
Know It’s an Active Investment
While real estate investments often have higher returns than more passive investments such as stocks and bonds, property owners work for those extra earnings. Even if you leave the day-to-day work to others, such as a property manager (who will likely charge about 10% of the collected rent for their services), you’re going to expend time, energy, and money on your investment. So know that you’re ready to make time in your life for this investment.
Know the ROI
Before purchasing an investment property, you’ll want to approximate its return on investment (ROI). Calculating ROI on rental properties can be complicated as there are a variety of financial factors, including some unknowns, such as the exact cost of future maintenance and repairs and how the property value will change over time. But it starts with a search of similar properties in the area to see the rent they generate.
Know the Right Real Estate Agent
Finding an investor-friendly real estate agent can make a huge difference, as these professionals know the market, are skilled at analyzing investment deals, and may have access to off-market properties. You might start by getting references from management companies, title companies, and other investors.
Know the Right Financing
Some popular loans for investment properties include:
- Investor Cash Flow loan. Unique among Non-QM loans, this program is designed for investment properties, as qualification is based on the projected cash a rental property will generate rather than the borrower’s employment and income documentation.
- Asset Qualifier loan. It’s common for real estate investors to have considerable assets but not consistent documentable income, such as a weekly paycheck. This loan is for them.
- Full Documentation loan. Here, some income verification, including W-2s, is used to approve loans for up to $3.5 million for investment properties.
- Bank Statement loan. Self-employed investors can buy properties with this loan that verifies income through personal or professional bank accounts instead of salaried jobs.
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