Buying Investment Property

Experienced Buyers already know, buying any property is a complicated process. It is important to start at the beginning and thoroughly understand each step. Investment properties have a number of costs that are both visible and hidden. As with any major purchase, it pays to be informed prior to making any decisions

MORTGAGE REQUIREMENTS

Investment properties are considered riskier because the home is not your primary residence. The down payment requirements for a fixed and adjustable 1-unit structure would be about 15 percent and 25 percent respectively. In 2 to 4 units, those down payment requirements jump to 25 percent and 35 percent. If your credit score is less than 720, expect to pay even more.

PROPERTY TAXES

Depending on where you purchase, property taxes can add significantly to the property cost. Be sure to contact the municipality directly to ensure that the taxes listed on the MLS are accurate. It’s also a good idea to find out what services those taxes include. For example, does that include garbage removal?

HOMEOWNERS INSURANCE

Insurance can vary depending on your region, especially if the property is located in an area prone to flooding, fires or other perils. Be sure to discuss rates with an insurance representative prior to entering into a contract on the property. 

MAINTENANCE

It’s a good idea to budget 10 to 15 percent of the annual property rent for maintenance and upkeep of the property, in addition to any tenant-caused damage that should be covered by security deposits.

ASSOCIATION FEES

Some condominiums and homeowners associations have monthly fees associated with them. These also need to be included in your budget. If the unit is part of an association, be sure that there are no rules against rentals.

UTILITIES

While utilities like gas and electric are often the responsibility of the tenant, some services, like water and sewer, might be included in the rent. If you plan to include utilities in your rental price, get an estimate from the utility companies of the average monthly usage.

TENANT SEARCH

Finding good tenants also carries expenses. Hiring a property manager or real estate agent to handle the search for tenants will carry additional costs that vary considerably by market.

VACANCY ALLOWANCE

Don’t assume the property will be rented 12 months out of the year. Allow two months of vacancy when setting rents. It’s essential to understand your market to understand how long rental properties typically stay on the market.

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