How to Buy Your First Investment Property
This week, we’re answering questions and talking about how to buy your first investment property. Investment properties can be a great asset and a way to generate passive income if you’re willing to commit the time and money to it. It’s important to know what to look for in an investment property, how to use financial leverage, and the differences between a second home and an investment property.
What to Look for in an Investment Property
The biggest factor to consider is the neighborhood and accompanying amenities. Finding a good area, close to schools, shopping, and transportation will ensure you have long-term tenants. Something to be think about is purchasing fixer-uppers. In terms of what to look for in an investment property, fixer uppers can be a great way to start building equity. However, it helps if you have previous experience with the process and that you’ve taken the time to get numbers for the costs of repairs. I’ve also found it helps to have backup funds, just in case the repair bids increase.
What is Leverage?
When researching what to look for in an investment property, leverage is crucial step in the process. Leverage is how much money you borrow to finance an investment property, compared to the property’s worth. By using leverage, you’re able to purchase higher-valued properties and appreciate more over time. There can be an exceptional increase in equity once you’ve leveraged your property. To calculate your leverage, you divide your investment property financing amount by the property value.
For example, if you have $50,000 in cash, you can:
- Buy a $50,000 investment property, which is 0% leverage.
- Buy a $100,000 investment property, use your $50,000, and borrow $50,000. This equals a 50% leverage.
- Buy a $200,000 property using the $50,000 on hand and borrow $150,000, which equals 75% leverage.
If property values increased by 7% this year, you would make:
- With option 1, your property value is $53,500 and your net gains is $3,500.
- With option 2, your property value is $107,000 and your net gains is $7,000.
- With option 3, your property value is $214,000 and your net gains is $14,000.
Differences Between an Investment Property and a Second Home
It’s important to realize the main differences between a second home and an investment property. Investment properties are primarily purchased to generate income, save on income taxes, and revenue gained from appreciation in the property value over time. A second home could be a vacation home you live in for periods of time during the year or an Airbnb home you rent as a host, which we talked about last week. If you don’t live in a house on a semi-regular basis, lenders consider it an investment property.
If you’re considering starting the process of purchasing or have questions about to what to look for in an investment property, give me a call! I’m always happy to answer your questions.
Don’t forget to check out tomorrow’s Facebook live video on how to buy your first investment property, at 3p this time!