How To Choose the Right Investment Property for Purchase
There’s a lot to consider when you’re searching for the perfect place to live. There’s even more to consider when you start shopping for an investment property to leverage for rental income.
This is especially true now that online services that help you source properties and property managers across the country.
“These services help break down the geographic barriers to real estate investing and untether the investor from their local market” says Suresh Srinivasan, Chief Marketing Officer of Roofstock. “An investor living in a high-priced market who may previously have only considered buying one rental property locally, now has the opportunity to build a portfolio of rental properties across the U.S. where it may be more feasible to hit specific cash flow goals and achieve geographic diversification in the process.”
With the entire U.S. to choose from, investors may get caught in a paradox of choice. Especially if they don’t have a good advisor or method to pick markets, neighborhoods, and properties.
4 Steps to Narrow Your Property Options
If removing proximity from the equation has left you struggling, here is a list of factors to consider as you search for the right investment property for your financial goals.
1. Identify Your Preferred Market
Deciding on a market seems daunting when looking at a map of the U.S. You’ll need to find a way to narrow your choices. “We find that most remote investors try to find neighborhoods that are similar to the ones they are already familiar with,” says Srinivasan.
Once you’ve created a list of potential markets, be sure to evaluate the economics of the individual communities. This could include:
- Rental Affordability
- Revenue Potential
- Local Regulations
Compare the average rent and average income for the area to ensure affordability. A general rule of thumb is to keep housing expenses at or below 30% of gross income.
You can also calculate the price-to-rent ratio (median home value divided by median annual rent) to verify wages have kept up with rent. This is especially important in recessionary times.
Compare the average rent to your anticipated mortgage expense. Proximity to military bases and high-quality schools tends to be a good indicator for revenue potential.
Be sure to also plan for vacancies. Generally, a 25% vacancy factor is a good way to plan for expenses while transitioning tenants.
If you’d like to use the property as a short-term rental, be sure to research local laws, as some cities have limits on vacation rentals.
This can be a lot of information to process. Lean into tools to help you sift through the data, such as Roofstock’s Neighborhood Rating, which aggregates information about local neighborhoods and ranks them on a 5-point scale so it’s easier to find an area of your liking.
2. Determine the Best Property Type
Are you looking to purchase a standalone house, multi-unit property, or a condo that’s part of a complex? Each property type comes with its own set of pros and cons, especially when it comes to maintenance and amenities.
You’ll also want to factor in homeowners associations (HOAs). If there’s an HOA, do your homework to learn rental rules before you purchase. Also be sure to research association dues and special assessments for communal maintenance.
Lastly, single-family property loans (what you likely think of with a mortgage) typically cover dwellings of up to four units. Keep this in mind if you look at multi-unit properties. There may be different financing qualifications for you to consider.
3. Evaluate the Property Condition
Once you’ve narrowed down the location and property type, you’re ready to evaluate individual properties. As you review your options, think about the costs of initial repairs and long-term maintenance.
- Initial Repairs
- Long-Term Maintenance
Seeking a property that’s in good repair helps lessen your upfront costs. Don’t skip on home inspections. They can uncover costly issues that might go unnoticed in pictures and in-person walk-throughs.
Keep in mind the extra costs that come with certain property features. The costs associated with pools, landscaping, appliances, paint, flooring, and roofing can all add up. Also consider the property size – larger properties mean larger maintenance costs!
4. Factor in Long-Term Costs
As you develop your budget and determine a property’s affordability, remember to consider:
- Utilities, including electricity, gas, waste management, water, and sewer
- Maintenance, including landscaping, HOA fees, pool service, pest control, and appliances
- Property tax and special assessments
- Property management
Property management can be either a set annual fee or a percentage of the monthly rent. This reduces your overall income but helps mitigate risk and reduces your personal responsibilities.
If you’re working with a property management company, they should be able to provide guidance on average expenses for area properties. Also, HOAs may cover some of the expenses listed above, such as landscaping.
Don’t Forget the Financing
Investment property mortgages are different from the home loan you obtain for your primary residence. Many investors aren’t aware of the differences when purchasing their first rental property. As a result, they run up against financing roadblocks. You can lessen potential issues by working with a lender that specializes in investment properties.
Axos Bank’s mortgage program offers solutions tailored for rental properties. This includes title vesting to limit personal liability and maintain privacy. It also includes debt service coverage ratio (DSCR), which allows you to use projected rental income as an income qualifier for the loan.
As you start your investment property search, keep us in mind. Our team of mortgage experts is here to help find a financing solution that works with your real estate goals.
How To Choose the Right Investment Property for Purchase
This blog was published by Axos Bank on October 5, 2022, and last updated on October 5, 2022.
This material has been prepared for informational purposes only and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transactions.
Roofstock is an Axos Bank marketing partner.