3 Tips for First-Time Investment Property Buyers
Eighteen percent of occupied homes in 2012 were rentals, up from 15 percent the previous year, according to a USA Today analysis of Census data. Experts attribute this large number to the massive amount of foreclosures that began in 2008, forcing one-time homeowners into rentals, as well as tougher credit restrictions to qualify for a mortgage. Market conditions are currently ripe for first-time investors to enter the rental industry—the average 30-year mortgage rate has leveled off after gaining nearly a full percentage point from January 2013 to 2014, due to the Federal Reserve speculating and then executing the taper of QE3. The most difficult part about buying your first investment property will be lack of experience. Keep these things in mind to make the process as smooth as possible. Let’s check out the 3 tips for first-time investment property buyers…
The first investment property a young buyer purchases will likely be the first home he or she buys, period. Consider living in your first investment property for a year before renting it out. REO, or real estate owned, properties are the best source for great deals on nice properties. These are homes the bank foreclosed on, but then failed to sell at auction. Banks are not property managers and do not want that role, so they try their best to get rid of REO properties as quickly as possible. And therein lies the opportunity for newbie investors.
Wells Fargo, along with government-sponsored enterprises like Fannie Mae and Freddie Mac, give priority to buyers who will occupy the property immediately. Federal programs like HUD and the VA also allow you to make a smaller down payment on properties you indicate will be owner-occupied. Living in your new property for a year can also help you discover any issues that may arise later when tenants move in. Once you’ve put your 12 months in, rent the home out and start seeking your second investment property.
Self-Management vs. Professional Manager
Some investors have no choice but to hire an outside manager—maybe they reside in a different city or don’t know anything about home repairs and maintenance. Regardless, once you rent the home, you become the landlord.
RealEstate.com estimates that a typical outside property manager costs up to 10 percent of monthly rental revenues. But a good manager will also decrease your costs by having electrical, plumbing and other skills, so you don’t have to hire third-party contractors when maintenance issues arise. Self-management will theoretically save you money, but could prove disastrous if you don’t consider yourself a handyman.
The obvious goal of all property managers is to make money. This cannot happen if the mortgage payment is $1,000 per month and the monthly rent is the same. Granted, you can eventually refinance and lower your monthly obligation. But to turn a profit, the initial investment property must either be paid for in cash or with a substantial down payment.
Do a financial inventory to discover where you can come up with the funds to buy a house outright. Consider cashing out a 401(k) and bet on your property management skills over the stock market for your retirement. You could potentially sell your future annuity payments to a third-party company for a lump sum of cash. Those who aren’t too proud can even move back with their parents for a year and save toward a large down payment.
Property management is not a get-rich-quick scheme. But it can be a lucrative enterprise if done correctly. The key is to have patience and not overreact when/if issues arise.
I hope you have enjoyed these 3 Tips for First-Time Investment Property Buyers. Remember to have a viable plan and the experience you gain from your first investment property will be a positive one. Happy house hunting!