Perhaps you’re about to pay off your mortgage — congratulations! But maybe you’ve also been trying to decide what’s next. If getting into real estate investing is on your bucket list, here are a few things to consider to help you decide if you’re ready to buy an investment property.
Similarly to buying your own home, you have to first consider your personal financial situation. In particular, experts advise thinking about what disposable income you have to put toward an investment property. Sure, you will have financing options — but not all loan types are available to all investors, according to Forbes. A conventional loan will likely require a larger down payment and a higher credit score. According to U.S. News and & World Report, interest rates are typically higher for investment properties, so it’s a good rule of thumb to make sure your credit is as good as it can be.
Spend some time educating yourself about the real estate market in locations where you might want to invest. When you think that you’ve found the right property, it’s a good idea to do the math to make sure it really would make for a sound investment. Forbes recommends finding your cap rate, “or the ratio of a property’s net income to its purchase price.”
If you plan to rent out your investment property, remember that there’s a lot more that goes into being a landlord than simply handing someone the keys and collecting a rent check each month. Each city has its own laws that govern tenants’ rights and rental properties, so as a landlord you would be responsible for complying with those regulations.
Investment properties can require a significant amount of your time and money. Sometimes, as U.S. News and World Report notes, those requirements coincide when you have a vacancy, which costs a landlord income. Experts advise that prospective landlords be able to handle vacancies without rushing to get a tenant — any tenant — into the property. Careful selection of tenants is another thing that will require time and money, since credit and other background checks can be costly and take a significant amount of time. Additionally, landlords will need to have money stashed away for repairs and upkeep.
Above all, experts say, anyone considering an investment home should have patience and plan to invest for the long term — even if there’s hope that the investment could pay off sooner. You never know what could happen, so you’ll want to make sure you are covered no matter what.