If you have been tossing around the idea of buying an investment property then the low interest rates are probably giving you all the motivation you need to start house shopping. However, although today’s super low rates are attractive, they should not be the only thing you are basing your decision on.
Explore Your Options
All investment properties are not the same. Are you focused solely on becoming a landlord or would you rather flip properties? Rates and basis for approval will be very different for both.
Location, Location, Location
Location really is everything, especially when you are purchasing a rental property. For your investment to be profitable long-term it needs to be somewhere people are going to want to live well into the future. You may get a great deal on a house in a neighborhood everyone is leaving, but who are you going to rent to? Renters gravitate to safe neighborhoods. If kids are in the equation, school district becomes a factor. Plus, you are going to want to sell eventually, so the location should play a big role in your decision.
Make Sure You Have Capital
Just because you plan on renting the property does not mean you can rely on that income every month. Whether the property is vacant or you have a renter who falls behind on payments, you need to have assets to cover mortgage payments for at least six months. Not to mention, you need to be prepared for unexpected repairs.
Figure Out the Cap Rate
The overall return needs to be a focus when purchasing an investment property. Add up all operating costs and subtract them from the amount you will be charging for rent. Multiply this number by 12 (months) to get your annual net operating income (NOI). Divide the NOI by your property purchase price. So, if your NOI ends up being $5,200 and the purchase price is $100,000, then your return on asset value will be 5.2 percent. This is acceptable, but it could be better.
Consider Property Taxes
If you hope to make money with your investment property, you need to know what you will be paying out in property tax. Keep in mind that high taxes are not always bad. If the home is in a popular neighborhood and near a great school, they could be well worth it.
Low interest rates may be inspiring you to invest in a rental property, but it is important to base your decision on other factors, as well. To ensure you are making the right decision, consider location, cap rate, and property taxes, and make sure you have enough capital for emergencies.