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Start generating more income by purchasing an investment property.
An investment property is purchased to generate income – and is not your primary residence. Qualifying for a mortgage to purchase an investment property can be more difficult due to the more stringent lending guidelines.
Investing in real estate is a great way to increase your monthly income by renting the property to tenants. Purchasing an investment property also allows you to diversify your investment portfolio, which can protect you during economic downturns.
As with any large purchase, there are key factors to consider before investing in real estate:
The location of your investment property can play a significant role in attracting tenants. Depending on the type of property and the market for tenants, you may want to purchase a property in a neighborhood close to restaurants, parks, and stores and has a highly ranked school district.
You’ll also want to think about whether you’d like to manage the property yourself or hire a property management company. Being a landlord is a big commitment that requires you to be available 24 hours per day. If you can’t picture yourself dealing with the property upkeep or a tenant who violates the lease terms, a property management company might be the best choice for you (for a monthly fee, of course).
Owning an investment property can carry many benefits, but there are risks to keep in mind as well. You may experience vacancies, get a bad tenant, or the property could face serious damages – it’s important to weigh these options against the potential income and equity an investment property can bring.
One way to determine how profitable an investment property will be is to calculate the “return on investment” (ROI). There are a few ways to calculate ROI – we will do so by dividing net operating income by the mortgage value.
ROI = (Annual Rental Income – Annual Operating Costs) / Mortgage Value
For example, let’s say you rent out your property for $2,000/month ($24,000 per year). For our example, we’ll say that your operating costs for things like insurance, property taxes, maintenance, etc are $1,000/month ($12,000 per year) and your current mortgage is $400,000. Using our formula, we can then calculate that your ROI is 3%.
($24,000 – $12,000) / $400,000 = 0.03 = 3%
While it may take some time to reap the benefits of purchasing an investment property, those with the patience to see positive returns have the potential to generate substantial cash flow. Income potential is often the main reason many choose to invest in real estate.
Real estate can be an excellent long-term investment plan. Those who hold onto rental properties over a long period of time can benefit from appreciation and eventually sell the property for a large profit, all while earning monthly income.
Purchasing an investment property comes with tax benefits. You can deduct many expenses associated with owning an investment property, including mortgage interest, property taxes, insurance, and the cost of ongoing maintenance/repairs.
You’ll need a significant chunk of cash to get an investment property up and running. Minimum down payment requirements start at 15% for investment properties, and you’ll need to show additional months of “reserve” funds on hand to cover the mortgage in case of a financial emergency. Once you’ve purchased the home, repairs or renovations may be necessary to make the home attractive to potential tenants.
Managing an investment property can be very time-consuming. You will need to find responsible tenants, make sure rent is paid on time, and perform maintenance or repairs if needed. You could hire a property manager to take care of these for you, but this will cost you between 8-12% of your monthly rental income, on average.
Because real estate is not a liquid asset, you’ll need to sell the property if you’re in need of cash. It can take several months to list a property and complete the sale, so you won’t have immediate access to your money.
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There are fewer options for jumbo investment properties, as not all jumbo investors will lend on these properties. Guidelines will vary widely from investor to investor, so it is wise to discuss potential options with a lender for these higher loan amounts.
There is no one-size-fits-all for mortgage financing. The best way to determine whether an investment property loan makes the most sense for you is to talk to one of our mortgage experts at JVM Lending. Our experts can walk you through monthly payment scenarios, give you current interest rates, and discuss any other questions or concerns you might have.
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