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Buying an Investment Property – How and Why

September 19, 2016

Purchasing investment properties can be the key to building long-term wealth. Whether the intent is to purchase single family residences or a multi-plex property for rentals, the wealth built may seem incremental in terms of what you might see every month in the beginning (and some months if the property is not rented, it may not seem worth the hassle), but it is important to remember that the cumulative effect of inflation and appreciation makes holding rental properties very lucrative.

 

For example, let’s say you want to buy a single family home as a rental. You purchase that home for $200,000 and put down $40,000. Your monthly principle and interest payment will be around $763 (assuming 4% interest on a 30 year fixed rate mortgage) and the going rent for a property like yours in your area is $975 per month.  The property management company may charge 5% of rent; you have property taxes and insurance to pay along with utilities and maintenance. At the end of the day, there isn’t going to be much left in your pocket. However – fast forward ten years. In that time, rents may have increased by $250 per month or more, but the amount you are paying in principle and interest remains the same. Another thing to keep in mind is the property continues to appreciate each year - an average of 5% or more is not uncommon in many areas of the country. The property you bought today for $200,000 could be worth $256,672 or more in ten years!
 

If you are considering purchasing a property as a rental, there are important things to keep in mind before jumping in. First, you need to know how much you can afford – in terms of not only the purchase price and the cost of the loan, but also the property taxes, insurance, utilities (whatever you as the landlord will be paying in addition to the utilities on units that are between tenants), and necessary improvements and repairs to the property.  Second, you need to review the average amount of rent charged in your area (as you need to determine what the monthly income will be to offset your costs for the type of property you want to invest in). Additionally, it is very important to determine if you will be handling the day-to-day operations or if you will be handing those tasks off to a property management company. If indeed a property management company will be included, make sure those monthly fees are accounted for in the monthly costs.
 

Armed with those pieces of information, it is time to discuss your wants and needs with a lender.  Make sure you understand all the information that your lender will require of you well in advance of deciding on a property. Getting pre-qualified is ideal. Keep in mind that if interest rates fluctuate much, that may affect your buying power.
 

When it is time to start shopping, be sure to let your real estate agent know what you are looking for and the parameters you need to stay within in order to find the ideal properties for your situation. Your agent should be able to guide you through the ins and outs of the real estate market and should have recommendations when it comes to property management as well as other vendors you may need to call upon to make sure your rental is up to par. There are several good real estate investments on the market right now that would serve as good solid rentals. Give me a call at 206-730-0962 to learn more about the ins and outs of buying investment property in our area.

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