Tips for buying your first investment property
There are many people who believe that when it comes to investing, nothing beats real estate. This may be true, but you still have to be smart when making your real estate investment decisions. Although investment properties can be a savvy financial move, there is plenty that can go wrong if you don’t fully understand the market, the types of investment properties, and your current financial situation.
1. Know your financial situation
You probably want an investment property as a way of bringing in extra money, but how much do you need and what do you want that money for? Is the investment property to fund your retirement? To create a little extra cash flow for your current lifestyle? Do you have enough assets and income to cover for the down payment? If you’re investing in residential real estate, can you afford the mortgage payments during periods no one resides in the house? Can you cover maintenance costs?
Take a hard look at your current financial situation and your goals. Will buying the income property help you reach those goals or are there better investment options, depending on your overall needs? Consider talking to a financial advisor, who can explain the options available to you and what works best based on your current situation and your goals.
2. Know the types of real estate investments
Typically, the first type of investment to come to mind is residential property, which can be a great investment property. Such investments are easy to understand and fairly straightforward—you buy property such as an apartment, house, or vacation home—and then rent it out, often under a lease agreement. Since there are always people who need a place to live but aren’t in a position to buy, there is always a need for rental properties.
Residential real estate isn’t the only type of investment property, however. You could look into commercial real estate—such as office space or professional units—which tends to be more stable than residential because it comes with longer leases. Retail real estate is similar to commercial, but is for retail businesses such as restaurants or consumer goods stores. Retail real estate may provide you with additional income above the rent because landlords often sign agreements with the business where the landlord receives a share of business profits. Additionally, such agreements tend to be for longer terms than residential real estate so they offer more stable income.
Other types of investment properties include vacant land, although that only provides income if you develop the land or sell it, and industrial real estate.
3. Understand the market
Before you invest, it’s vital that you understand the real estate market you intend to invest in. Real estate prices fluctuate and are affected by a variety of factors. A large industrial business closing can lower real estate prices drastically, just as changes to government policy can affect the value of your investment. You’ll need to understand the region you want to buy in, any anticipated changes to that area, where the real estate is the most valuable—or the most stable—and other factors that affect real estate prices in that area.
Investment properties are a great way to enhance your income, but it can take a while before you start noticing changes to your bank account. The best thing you can do before investing in real estate is research. Make sure you know and understand the real estate market, the types of investment properties available to you and which work best for your needs, and what your financial situation and goals are. Doing so will help you make the best property investment decisions for you.