Thinking about purchasing an investment property? Real estate has produced many of the world’s wealthiest people, so there are plenty of reasons to think that it is a sound investment. Experts agree, however, that as with any investment, it’s better to be well-versed before diving in with hundreds of thousands of euro. Here are the factors and challenges you should consider before buying your first rental property.
Being a landlord can be a good way to earn real estate income, but it’s not easy or glamorous. In addition to choosing the right property, prepping the unit, and finding reliable tenants, there are always maintenance hassles and headaches.
Do you know your way around a toolbox? How are you at repairing drywall or unclogging a toilet? Sure, you could call somebody to do it for you or you could hire a property manager, but that will eat into your profits. Property owners who have one or two homes often do their own repairs to save money.
Savvy investors might carry debt as part of their portfolio investment strategy, but the average person should avoid it. If you have student loans, unpaid medical bills, or children who will attend college soon, purchasing a rental property may not be the right move for now.
Investment properties generally require a larger down payment than owner-occupied properties do; they have more stringent approval requirements. The 3% you may have put down on the home where you currently live isn’t going to work for an investment property. You will need at least a 20% down payment, given that mortgage insurance isn’t available on rental properties. You may, however, be able to obtain the down payment through bank financing, such as a personal loan.
Find the Right Location
The last thing you want is to be stuck with a rental property in an area that is declining rather than stable or picking up steam. A city or locale where the population is growing and a revitalization plan is underway represents a potential investment opportunity.
When choosing a profitable rental property, look for a location with low property taxes, a decent school district, and plenty of amenities, such as restaurants, coffee shops, shopping, trails, and parks. In addition, a neighborhood with a low crime rate, easy access to public transportation, and a growing job market may mean a larger pool of potential renters.
Though a rental property mortgage is basically the same as a primary residence mortgage, there are some key differences. For starters, there are higher rates of default on rental property loans because borrowers facing financial troubles tend to focus on a primary home’s mortgage first. The added risk means lenders typically charge higher interest rates on rental properties.