Buying your first investment property could be a smart move if done right. It allows you to reap the rewards of your capital growth and home value appreciation, as well as tax breaks and equity gains. But before you start hunting for your ideal rental investment properties, it is important to know what you are getting into.
There is also a good amount of risk involved – large upfront costs, ongoing expenses, and the possibility of a net loss. It requires some strategic thinking and planning that takes into account market trends and standard investment guidelines.
So if you’re a new investor, here are 5 things you should know before buying your first investment property. Here’s a quick rundown of the top points you may want to consider.
1. Context Matters
This is actually just another way of saying (as you’ve no doubt heard about purchasing any kind of real estate) that location is paramount. You simply must carefully consider the context – that is, the location – when buying your first investment property.
For example, a stunning vacation home isn’t going to have much luck with vacationers if it’s located somewhere that people don’t tend to visit. Likewise, while a fixer-upper might be a good choice somewhere like the Bay Area, where housing competition is high and you can easily recoup your renovation costs, you might end up at a loss with a fixer-upper in a less competitive market.
Industry pros advise, then, that you consider the location first and the property itself second.
A great deal in the wrong location is no deal at all. So be sure to contact your NextHome Titletown Real Estate agent at (617) 657-9811 to discover more about a potential property’s location.
2. Down Payment Will Be Different
Another thing you should definitely know about buying your first investment property in Boston is that down payment requirements for an investment property will be different from those for a typical residential property – sometimes by a lot.
Instead of being able to get away with putting down as low as 1% to 10%, you’ll typically need to put down at least 15 – 20%. Investment properties don’t qualify for mortgage insurance, plus there are stricter approval requirements when it comes to securing your financing, which results in the need for a more substantial down payment.
Before you decide to buy an investment property, you’ll want to make sure that you choose a mortgage option that best matches your situation. Many banks and mortgage companies offer loans specifically for investment properties.
3. The 1% Rule Rules
And before buying an investment property, you should see what the 1% rule tells you. This rule provides a good gauge of your return on a property, whether it is in fact a worthwhile investment. Here’s how the 1% Rule works:
Under the 1% Rule, each month you should be set to bring in no less than 1% of the price you paid for it, including both the purchase price and any additional money you put into it, such as repairs or renovations. For example, let’s assume that you buy an investment property for $225,000 and put in $25,000 worth of renovations for a total initial investment of $250,000. Ideally, you’d want to be pulling in at least 1% of that – so,$2,500 – a month in rent or other returns.
Bigger Pockets – an excellent resource for Real Estate Investing – has professed the benefits of the 2% Rule for many years. 2% Rule properties do exist, but they are very difficult to find these days, and many of the 2% Rule properties are low-priced offerings in less-desirable areas with sub-par tenant pools. Still, it’s worth investigating the 2% Rule
There are instances, however, when it may pay to ignore this rule – for example, when you’re playing the long game and getting low returns now for huge returns in the future. But, again, you should consult your Boston agent before making such a move.
4. There Are Risks
Even if the 1% rule shows you that you can make a decent return on your investment, you still need to be aware of the risks. Typical investment property risks include:
- Less interest in renting and/or fewer potential renters in the area than anticipated
- More and larger repairs and renovations than expected
- Drastic increases in property taxes and assessments
- Damaging swings in the local economy and/or market
- Bad tenants who don’t pay or cause a lot of damage or both
Certainly, buying your first investment property in Boston comes with a certain amount of inevitable risk, but it isn’t healthy to get too hung up on these risks. Just be aware of them and move forward.
5. Beginning Cautiously Is Best
Most experienced industry pros advise starting small and cautiously. So in buying your first investment property in Boston, you might be better off buying a property in the lower- or middle-price range.
And here’s why – you will need to spend more money on the renovation of the house before renting or selling it. Furthermore, since it is your first investment property, keeping your investment as low as possible will help you stay in the safe zone. Even if you don’t hit the expected profits, you won’t risk losing too much on it.
Bonus: A Good Local Agent Makes the Difference
It should be pretty apparent, then, that there are plenty of critical things to consider when buying your first investment property, some of which you may not have the skill or experience to tackle on your own. That’s where our experienced agents can help. So if you’re ready to take the first step toward buying your first investment property, contact us today at (617) 657-9811.
Boston and Beyond – Just Hit the Market!
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