Purchasing an investment property can be a great way to make your money work for you, but it is not something you should do lightly. If you’re considering buying an investment property, what do you need to know before you sign on the dotted line?
1. Don’t Buy the First Property You See
When it comes to choosing an investment property, keep this adage in mind: If it looks too good to be true, it probably is. Don’t select the first property that crosses your path, especially if it seems so appealing as to be nearly unbelievable. Look at the growth of the area, as well as the projected future of the neighborhood. A potential property might look ideal, but it might be in a dangerous community or an area where the housing market is heading down.
2. Be Prepared to Spend Money to Vet Potential Tenants
Purchasing an investment property and turning it into a rental can be an excellent way to guarantee a return on that investment, but while you want to have tenants in your property, you don’t want just any tenants. Before you agree to rent to anyone, you will need to:
- Collect an application. You can charge a fee for this to offset some of the costs.
- Run a credit check. Doing so will cost money, though the amount may vary from state to state.
- Run a background check. Look for previous evictions, criminal histories and any other public records.
- Contact their former landlords, if they’ve rented before.
- Contact their employer to ensure they have a reliable income.
- Interview the tenant.
Many of these steps will cost money, which the application fees may not cover. Don’t skip this step — the money you spend vetting potential tenants will be a minor investment compared to the costs of repairs after a lousy tenant trashes your property.
3. Keep Your Receipts
Make sure you’re keeping detailed financial records for each of your properties. Owning one or more investment properties, whether or not someone lives there, can qualify you for some significant tax breaks during each year’s tax season. Talk to your accountant before you make any major decisions to see which breaks to qualify for. You may want to update your existing properties to increase those tax breaks — things like adding energy-efficient appliances and windows can be significant improvements.
You don’t necessarily want to purchase a new home or piece of land for the tax breaks alone, but they can be a fantastic bonus come tax time.
4. Analyze Your Finances and Know Your Goals
Real estate investment is a bottomless pool, and you don’t want to jump in feet first if you’re not prepared. Before you sign on that first dotted line, take time to figure out what your financial goals are. Are you trying to make a lot of money quickly? Are you planning on purchasing a property and then taking out a home equity loan for another project? Knowing your goals intimately is the first step to investment property success.
The next step is to analyze your finances. Gather detailed information on your net income, cash flow and other variables that could impact your investment. Look for the path that makes the most financial sense. The way that leads to high returns quickly might not be the safest route and could leave you struggling to tread water because you jumped the gun and didn’t do your research first.
Ready, Set, Invest
Investment properties are just that — an investment. Don’t expect to buy a property and rake in the profits while ignoring any work you need to get done. Be smart about your finances, and don’t spend your money on something that seems too good to be true.