5 Things you must need to know when buying a Property
photo from: AlexRaths
Buying a property is not just like buying candy or a new dress. It is a serious thing that needs proper planning. It also requires time and effort to do your real estate market research before finally saying yes and trusting them with your money.
Before buying a property, you must ask yourself these questions: Is it worth the money? Is the location prone to disasters? etc. So, in this article, we will help you answer these questions and more by giving you the things you need to know before saying yes to that property.
You must evaluate the location of your investment property. If a beautiful vacation property is located where few people go, it will struggle to attract visitors. Similarly, while a fixer-upper may be an excellent choice in a market like the Bay Area, where housing competition is fierce, and you can quickly recoup your restoration costs, a fixer-upper in a less competitive market may result in a loss.
Consider the location first, then the property itself. It may seem counterintuitive—after all, you're buying a physical structure—but the "perfect" property in the wrong location isn't likely to be the right property.
The down payment requirements differ from a typical family house when purchasing an investment property. Instead of getting away with putting down as little as 1% to 10%, you'll need to put down at least 15% to 20%. Investment homes are not eligible for mortgage insurance, and there are tighter approval requirements when it comes to obtaining finance, necessitating a larger down payment.
Your credit score, income, and debt-to-income (DTI) ratio determine how much you'll need for a down payment. Before beginning on a home quest, tie up the details of your financing, just like any other real estate acquisition, so you know what's practical and what's not.
3. Fixes and Variable Expenses
An investment home isn't something you buy once and forget. There are both fixed and variable costs associated with maintaining any property. While predicting these costs with 100% accuracy may not always be feasible, you must budget wisely to avoid going into debt every year.
Fixed expenses that you'll need to consider include:
- Homeowner's insurance
- Property management expenses (if applicable)
- HOA fees (if applicable)
- General upkeep costs (cleaning, landscaping, etc.)
- Property Taxes
Variable expenses are hard to predict, so make sure that you make room for such costs that may incur in the future.
4. Property Management
Some real estate investors choose to interact directly with their tenants by acting as landlords or otherwise actively monitoring day-to-day operations. In contrast, others hire a management company to do so. Your level of involvement is determined by how involved you want to be and if you want to pay for a professional property management service.
Keep in mind that, while hiring a property management company is an investment, it is not always more costly than doing things yourself. It could be more time and cost-effective. Do some research to determine which is the better option, and keep these costs in mind while deciding whether or not to pursue a particular property.
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5. Know the risks
Buying a property is nothing without its risks. And it's crucial to know what these risks are. Here are the examples:
- Property Taxes could go up
- You could end up having high expenses
- The local market economy could change
- You can have lousy tenants, which means you'll have to pay for repairs or eviction.
- You might not get the rental interests you assume
Being aware of these risks is an advantage for you. Plan ahead of time, and organize everything. No investment can ever be guaranteed; all you can do is ensure you're not caught off guard if something goes wrong and have some built-in financial flexibility.
Do not be pressured to buy a property. Saying yes so easily may cause you trouble. It's better to take your time to buy a property with proper planning and be aware of the risks.