Where to purchase property

The information on this site does not modify any insurance policy terms in any way. Between a recent jump in inflation, historically low interest rates, and the mood of millennials to rent instead of own, buying rental property has been on an uptick in recent years. Real estate investing has consistently ranked as one of the top choices since Bankrate started the survey in Should you take the plunge on a rental property? Experts offer a qualified yes, provided you do your homework first.

Here are 10 things to consider before diving into an investment property. Forget the TV sitcom stereotypes of clueless landlords. Over the long-term, real estate investments may compare favorably to other long-term investments such as stocks, but the results can vary significantly depending on the circumstances of the region and specific property. Whether or not you finance the property and the terms of any financing can have a significant impact on the return you ultimately earn.

REITs are publicly traded securities that invest in real estate and typically pay a large percentage of their earnings back to investors in the form of dividends.

This may be a way to get exposure to real estate investing without the hassle of property management. While some financial pundits insist you should never buy a rental unless you can pay cash for it, Jeremy Kisner, a senior wealth adviser at Surevest Wealth Management in Phoenix, begs to differ. With a depreciation schedule of Not bad. This investor has a mortgage for 80 percent of the house, which compounds at 4 percent.

In fact, the situation for the leveraged owner is actually a little bit better than these numbers suggest. Most lenders require a down payment of at least 15 percent for an investment property. That old realtor mantra about the importance of location takes an interesting turn when applied to income property.

Investors can earn a return in two ways: cash flow and appreciation. In some areas investors may want higher cash flow in order to compensate them for slower appreciation. But if investors expect an area to appreciate substantially, they may be willing to forgo some of the cash flow in order to enjoy that appreciation.

The result: house appreciation outstrips the growth in rents, and houses appreciate while yielding relatively low cash flow. His solution: Err on the side of appreciation. If you feel like you're ready to buy a house, the first question you're likely to ask yourself is "how much can I afford?

Before you snap up that seemingly great buy on a home, learn how to analyze what "affordability" means. You'll need to consider various factors ranging from the debt-to-income DTI ratio to mortgage rates. The first and most obvious decision point involves money. If you have sufficient means to purchase a house for cash, then you certainly can afford to buy one now.

But how much mortgage can you afford? This ratio is used to determine if the borrower can make their payments each month. Some lenders may be more lenient or more rigid, depending on the real estate market and general economic conditions.

Of course, less debt is always better. Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take.

Why wouldn't you be able to use your full debt-to-income ratio if you don't have other debt? Basically, because lenders don't like you living on the edge. Financial misfortunes happen—you lose your job, your car gets totaled, a medical disability prevents you from working for a while. Most mortgages are long-term commitments. Keep in mind that you may be making those payments every month for the next 30 years. Accordingly, you should evaluate the reliability of your primary source of income.

You should also consider your prospects for the future and the likelihood that your expenses will rise over time. Perhaps you aren't planning on living in the home very long or have long-term plans to convert the home into an investment property. Similarly, you might not want to put that much cash down. You can buy a home with as little as 3. Being able to afford a new house today is not nearly as important as your ability to afford it over the long haul.

Needless to say, being able to afford a house and having a down payment doesn't answer the question of whether now is a good time for you to act on that option.

While there are many benefits to a larger down payment, don't sacrifice your emergency savings account completely to put more down on your home. You could end up in a pinch when unexpected repairs or other needs arise. Assuming you have your personal money situation under control, your next consideration is housing-market economics—either in your current locale or the one where you plan to move. A house is an expensive investment.

One way to do this is to answer the question— is it cheaper to rent than to buy? If buying works out to be less expensive than renting, that's a strong argument in favor of purchasing. For generations, buying a home was almost a guaranteed way to make money. While real estate has traditionally been considered a safe long-term investment, recessions and other disasters can test that theory—and make would-be homeowners think twice.

During the Great Recession many homeowners lost money when the real estate market crashed back in , and ended up owning homes that were worth far less than the price at which they were purchased for many years after. If you are buying the property on the belief that it will rise in value over time, be sure to factor the cost of interest payments on your mortgage, upgrades to the property, and ongoing or routine maintenance into your calculations.

Along those same lines, there are years when real estate prices are depressed and years when they are abnormally high. If prices are so low that it is obvious you are getting a good deal, you can take that as a sign that it might be a good time to make your purchase. There are so many factors at play. With an investment property, though, small changes — such as a new door or some minor improvements to the kitchen — can improve the likelihood of wooing good tenants at higher monthly rents.

With investment properties, not only are you riding the wave, but you own the wave. One of the biggest pitfalls that home buyers of any kind make is searching for a property before securing financing. But by the time you get preapproved for a mortgage, the house is already under contract with another buyer. It would be heartbreaking to be looking at houses at one price range, only to find out that you qualify for less. Getting preapproved allows you to make an educated decision about the investment property you plan to buy.

The exception to this would be if you purchase a multiple-unit property and plan to live in one of the units and rent out the others. The agency loans available to you will either be a fixed-rate mortgage or an adjustable rate mortgage ARM.

Both of these options have specific requirements when it comes to the down payment and credit score. Other than the down payment, the requirements for a rental property are somewhat similar to that of a mortgage for a primary residence.

Your mortgage company will also want you to have six months of mortgage payments in reserve in order to give yourself some buffer room in the event that you go through an unexpected financial challenge. While you will get a larger cash flow on that investment, it ties up all of your cash in a single place. While your immediate cash flow is lower, these returns will grow in the long-term, especially as rents increase and the mortgages get paid off. In the event that you purchase an investment property in cash, there may still be beneficial loan opportunities for your situation.

A cash-out refinance is a great option for these clients. What is an Investment Property? The higher the cap rate, the better the investment. How to Make Money from an Investment Property While stories of house-flipping dominate reality TV, rental income is a far more typical use of an investment property. NYC is One of the Best Places to Invest A robust job market means people can afford to pay high rents and a constantly burgeoning demand for rentals means low vacancy rates.

Risks of Investing in One Property A word of caution: experts say that buying just one investment property for rental income is like putting all your money in one stock. Consider All the Hidden Costs of Investing Aside from repair costs and ongoing maintenance expenses, an investment property requires a ton of money upfront. Ideally, you should have a substantial cushion for this purchase.

So should you steer clear of properties subject to this tax? Not necessarily. What would happen to your property during a blackout?

Have the windows been optimized to prevent drafts in the winter? Does the radiator leak or make noise? Ask fellow investors if they can recommend a realtor. When in doubt, start small. Hopefully you select quiet, respectful tenants to fill the other units! In short: these come with less risk. How to identify emerging areas? Where are your friends-of-friends all moving?

Where are people saying they have a sweet roof deck? Condo or Co-op? That will be used to calculate any capital gain. Frequently Asked Questions What is an investment property? Buying only properties is generally only good for a small amount of passive income. However, if you collect a fairly large portfolio of around 15 apartments, chances are your rental income will be in the six figures.

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