Should I Buy an Investment Property?

Learn the Benefits, Considerations, and Finance Considerations for an Investment Property

If you haven’t yet heard, the prices to rent in urban, metropolitan areas are skyrocketing and so are the reasons to invest your money into an income generating property and join in on all the fun. Especially as rental companies such as Airbnb and VRBO become so popular, it makes you wonder, is my money best spent on an investment property next?

Before you invest a chunk of your savings into areas such as the stock market, you may want to consider looking into an investment property instead. There are benefits and precautions to investing in real estate and we’d like to offer both sides of the coin: we’ll cover, why an income generating investment property may be a good idea, considerations for exercising caution, and what financing options are available to leverage your situation.

Why Invest in an Investment Property?

  1. Rental Income

Rent prices are reaching record heights and trends continue to show more young professionals renting longer, choosing to buy properties of their own later in life; This makes finding a qualified tenant for investment properties surprisingly easy, resulting in high demand for rental properties.

This rise in demand for rental properties has made it increasingly easy for renters to find qualified tenants for investment properties. Due to market trends and depending on how much you have for a down payment, it may be less expensive than it would be to rent that exact same property. For this very reason, an investment property may seem like a no-brainer simply due to the housing market and pricing.

  1. Planning for Retirement or Tuition

Retirement, as well as tuition costs, are higher than ever before. A comfortable retirement at the minimum requires $1 million in savings to sustain a simple lifestyle and this doesn’t consider that you may live for quite a long time after retirement. For this reason, many are evaluating other investment strategies beyond the typical 401k or CDs to save for their future.

Although you may be putting away a couple thousand every single month, this still might not help you reach the goals you aim to attain. Investing some of those savings into an investment property instead could be a great option to consider funding your retirement or tuition expenses by utilizing the cash flow you generate from rental income or reselling the property once the property price rises and the right buyer is found. In the right scenario, your initial capital investment will grow consistently because there are two factors combining to build your equity faster: your tenants pay down your loan balance and real estate has a pattern of appreciating over time.

  1. Generate Cash Flow

Any asset investment will help strengthen your financial profile, yet it is the potential to generate cash positive, passive income that can greatly increase your net worth. This is a huge benefit to a home loan because your tenant(s) will be the source of income paying down your mortgage. If you’re able to make a sound investment on a property and the rental income you receive covers the mortgage payment, property taxes, insurance, and other expenses, your investment property will generate positive cash flow, thus creating an additional income stream.

You may also choose to strategically reinvest your profit by making additional principal payments to pay off the mortgage faster. In other words, your profit from the rental income can be put back into your investment, accelerating the process of paying off the loan and decreasing the total cost by decreasing the amount of interest paid.

  1. Appreciation

Traditionally, real estate has been regarded as a sound investment for two reasons: it’s physical nature of ownership and the historical trend of real estate appreciation. Your investment in real estate carries value in that not only can you pay down the balance to build equity, but your property may also appreciate, generating additional equity over time. This is based on the historical trend in which property becomes more valuable over time as demand grows.

Even if you do not pay down your principal (mortgage balance), your investment property is likely to be worth more over time. This is an additional reason that many choose real estate as a viable investment strategy.

  1. Tax Benefits

If you invest in a home that you intend to own for over one year, you may enjoy significant tax benefits. However, if you purchase an investment property and decide to fix and flip, you will not receive these tax breaks. We recommend investing in an income generating property for the long haul to reap the benefits described above.

Although rent prices, planning for retirement or tuition, cash flow generation, real estate appreciation, and tax benefits are significant reasons why you might consider getting a mortgage on an investment property, we’ve also identified five precautions you may want to consider before making the investment.

Cautions for an Investment Property

  1. Property Prices

Just as rent prices are steadily rising, so are property prices. Although this is not a significant barrier as there are many opportunities for low down payment options for investment properties, high property prices are a common reason many may assume the barrier to getting an investment property is too high.

Although you will need to put money down on the property, it’s important to consider what amount is right for you before omitting the opportunity altogether. To learn more about down payments and how to plan for the outcome you seek, check out our recent blog: 3 Steps to Choosing the Right Down Payment for a Million-Dollar Property.

  1. Financial Commitment

Although you intend to have renters cover the cost of the investment and hopefully make some money on the side too, there is a financial commitment you make when you purchase an asset. It is important to recognize the level of risk your financial portfolio can maintain.

If you already have a primary mortgage and additional liabilities that you are barely able to cover, an additional asset and liability may not be the best next step for you; however, if you are in a strong financial position to make the required down payment, and are confident in your ability to cover the cost of your new monthly obligation in the event your tenant does not make their payments on time, this financial commitment will likely be a positive one.

The investment property model relies on a third party paying you to use your property. Whether you opt for a short-term renting model such as Airbnb or VRBO or seek long-term renters, you take the risk of the tenant requiring your attention or assistance, damaging the property, or failing to make rent payments.

Although there are solutions to all these such as hiring property management companies, signing renter agreements, and putting structures in place to avoid missed payments such as additional fees and penalties, these challenges could still occur.

  1. Large Repairs

Even if you place maintenance and repairs as the responsibility of your tenant, there is still a possibility that major damage could occur that is not caused by the tenant, or that significant repairs such as a new roof, siding, or windows may be required at some point. It is important to be prepared for these situations.

  1. Management Commitment

Regardless of your choice to manage your investment property yourself or hire a third-party management company or team to do it for you, you should be prepared to absorb the additional expense. If you choose the route of having someone else manage your real estate investment you should expect to spend roughly 10% of the monthly rental income you generate from the property.

Many real estate investors choose to leverage a property management company since the responsibility to manage it on your own is an added commitment that could require more time and attention than expected.

We highly recommend weighing the options of delegation versus handling the day to day management of your investment properties. Especially if you live remote from your investment property, a management team is largely a requirement to maintain the level of care to your asset as needed.

Is an Investment Property Right for Me?

There are clear reasons why you might consider an investment property to help grow your passive income, assets, and net worth; however, we also recognize there are also reasons to proceed with caution when considering the purchase of an investment opportunity.

With any investment, there is indeed a risk. The question then becomes, is this the best way for me to generate additional income and/or long-term wealth?

In many cases, we find our clients experience great success investing in real estate. So, let’s talk financing. You may be asking yourself, where can I start the process to understand if purchasing an investment property is right for me?

How Can I Finance an Investment Property?

There are four unique finance options you may want to understand before constructing your investment property mortgage. Here are the four key opportunities that are being offered right now to help you diversify your financial portfolio by purchasing an income generating property.

  1. Low Down Payment Options

Although investment properties historically required investors to put a significant amount down at signing, this is no longer a hard and fast rule. Oftentimes down payments do not need to be as high as you may think.

This trend can be clearly exemplified by the cost of rent. Knowing that you will indeed be able to pay your mortgage due to the income you’re expected to receive in rent makes these investments considerably less risky than in the past when rent was less inflated.

  1. Competitive Interest Rates with 25% or More Down

If you do have a considerable down payment stashed away, you will likely find highly competitive interest rates available to you, making these investments significantly less costly to you over time. Although lower down payment options are available, a 25% or more down payment will offer a wider array of options for home financing to reduce your overall cost in an investment property.

  1. Property Location

Another factor that may lower barriers to secure mortgage financing is the location of the real estate in question. If the mortgage payment is significantly lower than the market rental rates, lenders will incorporate the fact that you will be receiving additional income which may put you in a position to invest in more real estate than you expected.

Because a properties location provides a lender with average rent data, it is easy to determine if the going rental rates are on par or below the rate of the expected mortgage. For this reason, if you will easily be able to cover your mortgage with the average market rents in the area, there is less need for a personal inquisition of your financial profile; therefore, qualification of an investment property can at times be easier than when you purchased your primary residence. There are considerably more financing options emerging for investment properties than ever before and many do not rely exclusively on the borrower’s financial profile.

  1. Cash Out Refinance Opportunities

You may now take cash out on an investment property. This means that your investment could provide you with additional value if you find yourself in need of instant cash. Especially in markets that experience higher home appreciation rates, this could be helpful if you’re seeking capital for another investment. Historically it was much more difficult to access equity from investment properties. This opportunity provides another reason why you might consider getting an investment property.

Making the Choice: Should You Invest in Real Estate?

Rent prices, financial planning, cash flow generation, and appreciation are great reasons why you may choose to purchase an investment property. Conversely, property prices, financial commitment, tenant risk, large repairs, and management responsibility are common deterrents to such investments. It truly depends on your unique financial situation and how much financial risk you can feasibly manage. 

If you do decide to move forward with acquiring an investment property, we have shared four financing opportunities that may help you determine if an income generating mortgage is a viable option for you, given your financial profile.

Low down payment options, competitive interest rates, less focus on personal financials in certain property locations, and the opportunity to get a cash-out to refinance are significant benefits to an investment property; these options may help you consider if the benefits outweigh the cautions to an seeking a property for diversifying your financial portfolio.


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