When people think of investment properties, many automatically assume a second home, vacation home, or rental property. An investment property may also be a lower-valued home, whether because of foreclosure or needed repairs, that you invest into bringing up to market value. No matter what the scenario, your net worth and the value of your portfolio increases. The real question is whether or not you’re ready to add an investment property to your real estate portfolio. For the purposes of this article, we’ll assume you’re looking at a rental property. Here are some things you’ll need to consider.
Calculate Your Expenses
There are quite a number of online calculators you can use to determine whether or not an investment property will be profitable to you. They consider the purchase price, down payment, interest, homeowners insurance needs, municipal taxes, potential maintenance (whether you perform it or you have to hire someone), and more. You then look at the monthly rental value, potential rent increases, and inflation. What will be your gross yearly income? Check out this Good Mortgage sheet to get an idea of what you need to consider year to year.
Consider the Demographics
Be realistic. If you’re looking at a low-value investment property because you know you can fix it up, you also need to consider whether or not the work is worth the effort. Why was the home left to get to fixer-upper status? Are the people who live in the area where you hope to rent capable of paying a rent level that will make your investment a profitable part of your portfolio? You definitely need to find balance.
If you don’t like dealing with people, dealing with tenants may not be your cup of tea. It’s not just about collecting your rent check every month. It’s about dealing with late payments, communicating when repairs need to be made, and enforcing the terms of your lease. You do have options, though. You can do this yourself or you can hire an outside service or agent to handle the vetting and rental process for you, though the latter will end up costing you more money.
At the end of the day, an investment property can turn into a really great addition to your portfolio. Albeit sometimes problematic, the need for real estate and – right now – rentals, is relatively high. Talk to your lawyer and financial adviser to be sure you’re ready and then talk to your real estate agent about potential properties. The right one is out there!