Every year, hundreds of thousands of people make the decision to buy into one type of investment or another. But, six months or one year later, more than 80% percent of those same people are withdrawing these investments in frustration and failure.
The following year, this process repeats as another set of would-be investors throw their money at a supposedly fail-proof investment, only to get burned in the end. Yet, while all that happens, there are investors who are steadily profiting from their investments.
What is the difference between successful investors and people whose investments inevitably end up in disappointment? As a start, the most significant difference between successful and unsuccessful investors is each person’s level of due diligence.
There is a thin line that separates gambling from investing. That line is drawn by how much a would-be investor knows about their proposed investment. The more knowledge they have, the lower the risk of the investment and the greater control they have over the potential outcome.
This is the rule when investing in anything, including real estate. If you are reading this, you are likely thinking of buying your first investment property. That is great, but you should know that real estate investing is an endeavor fraught with risk.
That risk is only countered by sound knowledge. This is what helps you build a solid foundation for all your investments. What are the things you should know before you take the leap into the shark-infested waters of property investing? Read on to find out some of the best advices shared by Upkeep Media Inc.
What to know before you buy your first investment property
There are two categories to know before you buy your first rental property. The first involves the steps to take when applying for a mortgage. The second is the steps for assessing the potentials of an investment.
- Get your finances in order: The two criteria that lenders use to gauge prospective property investors are their credit score and history. You need a minimum credit score of 620 and there should be no delinquencies in your credit report. Lenders will also look at your level of indebtedness versus your monthly income. Ideally, you should not spend over 35% of your monthly income on monthly debt repayments.
- Sufficient savings: Lenders expect you have to have enough money set aside to make the down payment on the property (usually set at 20%), pay the mortgage closing costs, and take care of six months of mortgage payments on the investment property and your primary home.
- Know your investment loan options: You should acquaint yourself with the various sources of funding and the specific benefits of each. The more financing options at your disposal, the greater the chances you will find an option that lets you start your investment journey with the easiest terms.
- Start with a low-cost investment property: Use your first investment property as a way to learn the ropes. Limit your first investment to midrange properties that cost no more than $150,000. That way you can be sure if anything goes wrong, you will learn valuable lessons without losing too much.
- Base investment decisions on facts: The first and most important thing is to manage your expectations. The number one reason people make wrong investment decisions is that they hope for too much. Investing in real estate involves risks, benefits, and a lot of hard work. What are these risks and benefits? You must know them.
- How much can you reasonably expect to earn? Viable rental properties are estimated to earn an average of 1% of the purchase price of the property as its gross monthly rent. This means if you buy a rental for $200,000, you can expect it to generate at least $2,000 in monthly rent. A property that does this is generally considered to be a good choice.
- What is the projected cost of owning that property? The gross monthly rental income from the property is not how much money you will pocket every month. It is the income before you deduct your expenses for the property. Your expenses depend on the type of building, its condition, and how you manage the asset. As a rule, costs should not exceed 50% of your gross annual income.
- What factors affect the performance of the investment? Even when a property has the potential to generate substantial monthly income and expenses are low, other factors can upset your profit projections for the property. Examples include large unplanned expenses (capital expenditures), extended vacancies, bad tenants, accidental damage to the property, and more.
Finally, given that many factors which affect the viability of a property investment are outside your control, how do you guarantee success? You control the unknown by controlling the known. Doing everything to master those things under your power reduces the risks and impact of those things you don’t control.
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