Should I buy an investment property?

Historically, real estate has been a great investment. Those with enough money to purchase an investment property and hold on to it for a number of years were able to expect appreciation in the value of the home and a steady stream of renters to foot the month-by-month bills. Are those days long gone?
Maybe not. Sure, the market has been on a real roller coaster ride for the last few years, but that doesn’t mean that you’ve missed your chance to purchase an investment property. In fact, today may be a great time, and here’s why:

  • Interest rates are historically low.
  • Home prices have dropped significantly in the last few years.
  • A large inventory of homes on the market means sellers are willing to negotiate on price.
  • Tax benefits continue to apply to owners of investment properties.

According to the National Association of Realtors, sales of investment homes soared 64.5% in 2011. If you’re thinking about getting your hands on a piece of the investment market pie, consider these tips:

  1. Assemble your team. As with any home purchase, it’s important to have a group of advisors you trust. This obviously includes your real estate agent and mortgage broker, but it also includes a home inspector, contractor, accountant, and property manager. Start asking around for recommendations from friends and relatives.
  2. Have a healthy down payment. Buying an investment property is different than buying an owner-occupied home, when it comes to the lending process. Many banks want to see a down payment of at least 25%, if not 50%.
  3. Calculate your out-of-pocket expenses. If you’re going to be using the home as a rental property, consider costs like improvements to the home in order to make it tenant-ready, ongoing maintenance, property management fees, and the mortgage payments you’ll be responsible for in between tenants. If your plan is to renovate a home and resell it, consider not only the renovation costs, but also carrying costs if you can’t sell it as quickly as you’d like. You can find great investment property cost calculators online.
  4. Find the right location. Experts agree that you should buy the worst house in a nicer neighborhood, instead of the nicest house in a bad neighborhood. If you’re going to be renting, think of what kind of renter you’re hoping for (families, students, adult roommates) and think of what they’ll be looking for in a house: multiple bedrooms, parking, a fenced yard, proximity to public transportation, or a good school district, for example. Also, research comparable sales and rental rates in the neighborhood you choose.
  5. Make your offer contingent upon an inspection. If anything, an inspection is even more important on an investment property than your primary home. Your profits can quickly go down the drain if there are significant structural, plumbing, or electrical problems in the home you purchase.
  6. Don’t go overboard with renovations. Yes, it’s important to upgrade your investment property in order to make it livable and have it appeal to potential rentals or buyers. But, that doesn’t mean you have to put in hardwood floors, granite countertops, and stainless steel appliances. Consider the wear-and-tear that renters put on a home. If you’re planning on selling the home, you don’t want to out-price the neighborhood.

With a combination of preparation, research, analysis, and a little hard work, an investment property can be a great investment in today’s market, both in terms of short-term cash flow, and long-term real estate appreciation.