Can You Afford an Investment Property?

Making extra money without much work — it can seem almost too good to be true. Yet we’ve all heard of a friend (or a friend of a friend) who is making a killing with investment properties. With the housing market on the rebound, home values are rising across the nation and it could be a great time to invest in some real estate. Looking at home listings in the newspaper or on the Internet can be exciting and it might make you wonder if you should buy one as an investment.

Before you shell out the big bucks in the hopes of a stable financial future, it’s important that you understand what makes a good investment and focus on obtaining your returns. Here are some questions to ask yourself if you think maybe your next home purchase should be an investment property. If you think you’re ready, first check your credit profile. Unless you are paying in cash, you’ll need good credit in order to qualify for a mortgage and your credit score can also impact how much house you can afford. You can get your credit scores for free every month on Credit.com.

Are You Ready to Invest?

Owning an investment property is not for everyone. It’s a good idea to get a strong grasp on your personal finances and life plan before you decide to add real estate to your portfolio. You may want to read a few books and turn to online sources to see how real estate investing works and how the most successful investors use real estate. If you aren’t quite ready to do this on your own, consider the option of investing in real estate through a REIT.

What Kind of Property Should You Start With?

There are plenty of strategies you can use to customize your plan to fit your personality and abilities. Maybe you want to buy a duplex and live there while renting out the other unit. You might rent a home and buy a place to rent out, becoming a landlord. If you are good at construction or have a lot of connections in the industry, you may be looking at a fixer-upper. If you want to get right into making some money, you may want to look for move-in-ready options. It’s a good idea to get familiar with vacancy rates and rents in the area before you determine if it makes sense.

Can You Afford the Recurring Expenses?

Financing the property itself through a cash payment or down payment and mortgage is up to you — just be sure you have a real understanding of how this affects your finances before you begin. From there, you must estimate how much an investment property will cost you. There are, of course, repairs from time to time but there are also water, garbage, utilities, fuel and improvement fees. On top of that you will have to pay legal and accounting fees and must be prepared to cover the cost of the home entirely in the case of evictions or vacancies.

Will You Manage the Property Yourself?

Hiring a professional versus self-managing property is a decision largely dependent on your overall plan, time and skills. Managers often charge up to 10% of monthly rent, but can help you avoid vacancy and keep repair costs down. To handle real estate investing, you must be confident in your abilities to do the bookkeeping — otherwise, budget for the hiring of another professional. After you have come this far, you do not want to slip up on management and income tracking.