You have a home. You have your 401k, investment accounts, and emergency funds. Now you're looking for additional streams of revenue. Investment properties can be a great way to diversify your assets, but they can also mean a lot of work when you think about finding the right property, maintaining the property, and finding ongoing tenants. Here are just a few things to consider before jumping into the real estate world.
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Have the down payment. The rules for buying an investment property are different than those for buying a home you plan on living in. For starters, mortgage insurance isn't available, so you'll need that full 20 percent ready to put down. And you want to make sure that initial investment isn't going to break the bank. You'll still want your emergency savings, plus you'll want to have extra money set aside to take care of any issues that may come up with your investment property.
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Location, location, location. An investment property isn't going to do you any good if it's in a location that no one wants to rent. Take into consideration the type of property you're buying and what a tenant would be looking for. If it's in a metro area, being close to transportation is a good selling feature; if you're looking to rent out a single-family home, the quality of the school system may be important to tenants. Understanding the needs of your target tenant can help you keep the property rented out.
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Be handy. If you plan on managing the property on your own, be prepared for things to break, just like any home. Paying a handyman is always an option, but that will just mean less profit for you. You may want to take some time to learn how to handle basic home repairs.
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Brush up on landlord/tenant laws in your state. A tenant has rights and they vary by state. In general, the laws include guaranteeing the property is habitable, disclosing how the tenant's security deposit will be handled, and making necessary repairs.
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Don't take on more than you can handle. Maybe your long-term goal is to have a single- or multi-family property to manage, but you might want to start smaller with a townhouse or condo. This will give you a sense of the time and money it takes to maintain a property and manage tenants.
You definitely want to make sure you can afford an investment property, as well as all associated costs. Sitting down with a financial planner is a good first step. While it may be a lot of work to get started, the rewards can be great as well: passive income, tenants paying off the mortgage with their rent, and eventually, one hopes, financial freedom.
The information mentioned in this article is for informational purposes only, is intended to provide general guidance and does not constitute legal or tax advice. Each person's situation is unique and may materially differ from the information provided herein. You should seek the advice of a financial professional, tax consultant and/or legal counsel to address your specific needs before any financial or other commitments regarding the issues related to your situation are made. Popular Bank does not make any representations or warranties as to the content contained herein and disclaims any and all liability resulting from any use of or reliance on such content.