If you are looking for a lucrative way to increase your income, then buying an investment property can be a smart decision. This refers to purchasing real estate of any kind, usually an apartment building, commercial property, or vacant land, with the goal of earning some financial return. This return can either be a rental yield from renting the property to residents or a business, or for future gains by flipping the property and then selling it for profit.
However, receiving a big return on your investment is not always guaranteed. That’s why you need to be very strategic when choosing and buying your investment property so you can ensure great financial success.
So, whether this is your first time making such an investment or you are selling an older property only to buy a new one and make a greater profit, it is completely normal to feel overwhelmed by the process.
To get you started, here are five things you need to consider when purchasing an investment property.
Benefits and risks involved
Generating income is probably the biggest benefit you get from buying an investment property. Besides this, other great reasons why people choose to invest in real estate include capital growth, long-term security, tax advantages, and property value appreciation.
However, as with all things in real estate, purchasing an investment property also comes with a set of risks you should be aware of. Some of the most significant ones include not getting the rental interest that you expect, having expensive repairs, paying high property taxes, and dealing with bad tenants.
This is usually the case when you already own an investment property and want to sell it only to buy a new one and possibly get a greater return on it. For instance, if you’re trying to sell an investment property in Canada, click here to learn how to do it properly and make a profit.
Location and type of property
When buying an investment property, there are two important things you need to consider and these are the location and the type of property you are looking to invest in.
For example, when it comes to location, it is best that you put yourself in your tenant’s shoes and think about what they would be looking for in a rental. Choosing a property in a location with easy access to public transport, schools, and other amenities will make the property more appealing as opposed to choosing one that is further away from them.
Also, it is important that you think about the type of property you want to buy in the context of location. There are several types of investment properties you can choose, each coming with its own pros and cons you should evaluate.
For example, residential property in a suburban area is a great option for family-oriented tenants, whereas a commercial building downtown is more suitable for business professionals.
Financing investment property loans
If this is your first time purchasing an investment property, then you should know that buying one has a general start-up cost. With that being said, it is important that you consider how to secure financing so you can make your purchase.
In general, investment property financing can take several forms, each with a different set of requirements and criteria investors need to meet. The most common options people choose from include:
- Making a sizable down payment;
- Turning to a local bank for a conventional bank loan;
- Tapping your home equity;
- Taking a private money loan.
Fixed and variable expenses
In addition to securing the main finances to buy an investment property, there are other expenses that come along after you make your purchase. They can be both fixed and variable and are inherent in maintaining any type of property that you buy.
Examples of fixed expenses are:
- Property taxes;
- Homeowner’s insurance;
- General upkeep costs;
- Property management expenses, if you hire a property management service;
- Homeowners Association fees (if any).
As for the variable expenses, they are a bit harder to predict which is why you need to plan your budget carefully so you don’t end up in the red often.
Final thoughts
Buying an investment property is a great way to increase your income. However, in order to reap all the benefits it offers, it is important that you do your research first and understand how to make your purchase with the goal of earning a great profit.
For more help, refer to our post and read about the things you need to consider when purchasing an investment property.
