3 Steps: Prepping for Your First Investment Home

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Real Estate

If you've known the Burnses for a while, you've likely heard all about the renovation of our historic Hudson home (and my general love for properties with great potential-- read the first blog post in that series here). In fact, you've probably stopped by and spent time in the results! And all of you know I'm a realtor. But some of you may not know about my history as an investment property owner. Now as always, buying an investment property can be a great source of added income. But it's easy to jump in excitedly, forgetting a few practical considerations that we might already know-- theoretically. It never hurts to have a reminder! Take a look as today's guest blogger, Katie Conroy, walks through some of the 1-2-3's-- the very first commonsense steps to buying your very first investment property. 

How to Make Sure You’re Prepared Before Buying Your First Investment Property

Even if you’re a novice investor, you’re probably aware of the age-old advice to diversify your portfolio. For most people, diversifying means spreading out your risk by investing in a variety of stocks and bonds. However, those who invest in real estate recognize that the stock market isn’t the only way to make your money grow. While there are multiple ways to invest in real estate, one of the most common choices is to start by purchasing a rental property.

1. Start with Market Research

According to SmartAsset, an increasing number of people are actually buying their first home as an investment. This can be a smart way to get into the market, but if this is your first time buying a home, it’s even more important to get an idea of what the process is like. 

This step is important even if you’re already a homeowner, as there are several ways in which buying an investment can differ from buying a primary residence. For example, Bankrate explains that you may need to make a larger down payment to get a loan. In short: You shouldn’t assume the requirements will be the same as when you bought your first home.

2. Run the Numbers

After researching the market, the next step forward is to nail down your budget. The amount you have for a down payment will help set your budget, but remember that there’s more to this calculation than just how much you can afford. For example, if the property needs to be renovated, you should get an estimated cost of renovations, plus an estimated rental value once it has been renovated. Then, there are the ongoing costs of maintenance.

Keep in mind that there may also be some expenses you don’t think of at first, such as taking steps to keep the home safe and secure. The easiest solution is to install a home security system, which typically costs an average of about $675, plus the ongoing cost of a monitoring service. If an alarm isn’t in your budget, or even if it is, HomeAdvisor recommends using low-tech solutions for security; don’t underestimate simple measures, such as keeping bushes trimmed and planting prickly bushes near the home’s windows. 

3. Create a Business Plan

In many ways, deciding on how to handle things such as home security and other management issues is kind of like making a business plan. This is how you plan on running your property “business,” and figuring this out now will help set you up for success.

Some of the things to think about are how you will find tenants, handle tenant relationships, and take care of maintenance and general upkeep. You may want to do part or all of the work yourself, or you may want to hire a property manager to handle these things for you. Going with a property manager takes the work off of your shoulders, but it’s also an added expense. If you plan on managing a property yourself, plan on taking the time to learn how to do so effectively. And of course, you also need to set aside the time it will take out of your schedule.

You can see how this “business plan” impacts your budget, as well as the amount of time your investment will take. These are things you don’t want to be confronted with after signing the paperwork, which is why preparation is so key to your success. Buying your first rental property can be incredibly rewarding, but just like any other investment, having the right knowledge and a plan is essential for making sure your effort pays off.

posted by L. Lathrop for Jim Burns