Investment Properties – What to Expect
Investment properties are properties in which the owner plans to make a return on investment through either rental, resale, or both. With the right planning and management, they can be a nice little earner. There are some things to watch out for, however. Here are some things you will want to know about before you invest.
1. Initial Cost. Financing the purchase of your investment property could be harder if you already have a mortgage. One way you can do this is through a cash-out refinance, however you will need to have sufficient equity in your home, as well as pass your lender’s assessments. Investment property mortgages are another option, but make sure you talk to a mortgage broker as they can be costly, and you can expect down payments of at least 25%, as well as stricter credit score requirements and higher interest rates. The good news is that interest rates are VERY low right now!
2. Upkeep. Just like any house, an investment property will require maintenance. This can be anything from a fresh coat of paint, to plumbing repairs or installing new flooring. You’ll want to keep on top of repairs to minimize bigger problems and rental properties in particular can be high maintenance depending on the tenants who have lived there previously. Vacant properties also need to be cared for to prevent unexpected damage such as pipes freezing.
3. Finding the Right Tenant. If you’re buying an investment property that you intend to rent out, it’s important that you find the right tenants to live there. Ideally, you should draw up a contract that clearly stipulates rules such as no smoking or no pets, as well as ask for a security deposit. Yet even so, you should prepare for cases in which rent is paid late, tenants are disruptive, your property is damaged (whether on purpose or accidentally), items get stolen, or tenants simply leave without any notice. You will also need to know the renter’s rights (along with your own) so, in the event you do need to evict, you do so in accordance with the law.
4. Property Value. Depending on market fluctuations, the value of your property can either rise or fall. This can impact if you’re buying investment properties with the intention of selling them later on. The most common scenario is neighborhood decline, which will result in a depreciation of your property’s value. Regardless of whether you’re dealing in commercial or residential investment properties, pay close attention to the signs of a declining neighborhood prior to buying, such as an increased lack of stores or public transport.
5. Hidden Costs. Investment properties can have hidden expenses that might not be obvious at first sight. The best example is long periods of vacancy for rental properties, especially when there’s little demand. Not only that, but if you’re a landlord dealing with several rentals, you will find yourself in need of hiring a property manager, which adds to your monthly costs. Don’t forget to take property insurance into account, and also keep an eye out for an increase in local taxes.