The number of rental-occupied homes in the U.S. is more than half the number of owner-occupied homes, at 44 million to 75 million respectively. Rental costs increase annually, with the average annual increase right around 3%. The bottom line is, if you’re looking to make passive income, it may be worth your while to purchase an investment property.
Before you take the leap, though, Lucciare encourages you to make the following considerations.
Get Your Finances in Order
The first thing you need to do when you decide to purchase an investment property is get your finances in order. This entails boosting your credit score so you can qualify for an investment mortgage loan, saving enough for an adequate down payment and building up a cash reserve.
Qualifying for an investment mortgage loan is much more difficult than qualifying for a private home mortgage. With a PM loan, you can qualify with a credit score as low as 620. For an investment mortgage loan, you need at least a 680, though many lenders require higher scores.
You also need a sizable down payment. For a traditional home loan, you can qualify with a down payment as low as 3%. Most lenders, however, require at least a 15% to 20% down payment for investment properties. Many also require investors to have 12 months’ worth of mortgage payments in reserves.
Speaking of reserves, in addition to having enough money to cover the cost of a mortgage for a year, you need a year’s worth of reserves for additional expenses, such as maintenance, property management, taxes and insurance.
Decide on a Property
As a first-time investor, don’t make the mistake of viewing each property through a potential homeowner’s eyes, thereby causing you to overlook otherwise profitable features. Shift your focus so that you can ignore what you, personally, don’t like and see, instead, what renters may appreciate:
- Move-in ready condition (with appliances)
- A safe and secure neighborhood
- Access to amenities
- Proximity to public transportation
- Nearby schools with strong ratings
Though renters’ desires vary considerably, Norada explains that rentals with these features typically net the most profit.
Consider Property Maintenance Costs
One aspect of rental property ownership many first-time investors fail to consider is maintenance costs. Rental properties, like private homes, need routine maintenance and care. While many investors attempt to cut costs by not hiring a property manager, paying for the extra help could have major benefits. For instance, if you attempt to handle all the maintenance on your own, you’re looking at adding a second, full-time job to your schedule, and one for which you don’t get paid.
Regardless of whether you decide to hire a property manager, you should still account for major maintenance needs and repairs. Take yard upkeep, for instance. Even if you require tenants to maintain the lawn on their own, you are responsible for major issues, such as hazardous or fallen trees.
Remember, This is a Business
Running an investment property amounts to running a business, and as such, there are particulars that need to be addressed. This includes any necessary permits or business licenses, as well as registering your business with the state. Part of registering your business includes choosing a business entity, and as a rental property owner, it’s in your best interest to choose the LLC structure. This ensures asset protection and provides a handful of tax advantages. When you are ready to form a California business, an online formation service like ZenBusines can help remove some of the guesswork.
A rental property can be a great investment. However, before you make the leap, make sure you’re ready by carefully considering these points.
When you’re ready to give your rental property a luxury makeover, consider the beauty and timelessness of a Lucciare surface in your kitchen. Our engineered stone is both environmentally-sensitive and highly resilient. Visit one of our showrooms today to see our products in person.