Tips for investment property

An investment property is any property — a house, apartment building, or piece of land — that you purchase in order to earn a return on your money. Investment properties are not occupied by the owner.

While buying real estate has historically been a solid investment, it's not a guaranteed one. So, when debating whether to finance your first investment property, be prudent in your decision-making. Ask yourself these questions to determine how wise the investment may be before you apply for an investment property loan.

How long do you plan to own the investment property?

Whether it's a home, condo, or townhouse, give some serious thought to how long you're prepared to own this property. For some time, experts have generally stipulated that it takes as many as seven years before the upfront costs associated with any mortgage — including investment property loans — begin to be defrayed. That means if you're not prepared to own the property for at least that long, you may want to think twice before making the purchase.

How much can you afford?

When considering the purchase of a second property (in addition, presumably, to your primary residence), remember that lenders will consider your overall debt-to-income ratio in judging whether you're an appropriate risk. You'll need a larger down payment and will have to be able to meet your monthly payment obligations from a stable income stream. That means anyone considering financing an investment property will need either a pool of savings; a healthy, stable income stream; or both.

Have you thoroughly vetted your first investment property?

Before buying any property, be sure you're well aware of the factors that influence the property's value. This can help you avoid purchasing a property that has little promise of a good return. For starters, you should find out:

• What prices were paid recently for comparable properties in the immediate area?
• Is the property in a flood zone or other problematic area?
• How is the economy in that area? How are rental rates holding up?
• Who would take care of the property on a day-to-day basis (maintenance as well as dealing with tenants)?

Financing an investment property out of state

There are any number of reasons why an investor might become interested in buying property in another state. It might involve a location near family, a favorite urban area, on a coast, near the mountains, or other attractive physical setting. But, if you're looking into investment property finance options in another state, be sure you're aware of extra steps in the process. They may include:

• The need to budget for professional property management. Since you may be a significant distance away, you'll need to have someone you trust oversee the property, handle maintenance, and work to fill vacancies promptly.
• Legal and tax ramifications of living in one state and owning property in another. The necessary paperwork and the effects on your taxes will probably be notable, so make sure you work with an attorney or tax advisor to fully understand these factors before applying for investment property loans to make the purchase.

More information

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