Buying your first investment property is no cakewalk. There are many decisions that have to be made.
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Are you thinking about buying an investment property?
The first thing you need to do if you’re going to be an investor is decide whether you really want to be a landlord. If you think it’s just going to be all cash flow with no headaches, you might as well stop reading because that’s not going to happen.
So, if you’re still with me and you still want to buy that first investment property, the second thing you need to decide is what type of property you want. I would suggest going for a single duplex, triplex, or fourplex because it’s your first investment.
Once you’ve done that, you have to get approved for what you’re going to buy. How much money are you going to need, down payment-wise? Most investment properties need 20% to 25% down.
Now, there are other things you must decide. What kind of rents do you want? What neighborhood do you want the property to be in? How much do you want to put into the home to raise the value of the rents every month?
Know what area you want to be in and how hands-on you want to be.
Once you determine those answers, you can use a formula, but the formula must be one that you’re comfortable using. What percentage of return do you want to make? Find the property and the area that you want to live in, and your formula will tell you if it’s a good investment.
For example, if you want to make a 10% return, look at houses that provide that based on two, three, or four units. You determine that by taking the price of the home and dividing it by your net income. If four rents are all $500, then you’re bringing in $2,000 a month. You would then have to manage your taxes, your insurance, your maintenance, and any management fees you may have. If you plan on self-managing it, that won’t be a problem. You also want to consider the vacancy rate, because the units aren’t going to be occupied all year long.
The net number from all of these variables is divided by the sale price, and that should tell you exactly what your net return is going to be. Keep in mind that there are many formulas out there; this is just one of them. There are different formulas for every person.
If you have any questions on this topic, please give us a call or email us at your convenience. We’d be happy to go into further detail with you!