NEW YORK, December 6, 2021 (Newswire.com) - Real estate investing can be a smart financial move to diversify a financial portfolio. But buying a first investment property can be challenging, and there are many financial implications to consider beyond just how much the property will cost. That's where these five tips for buying a first investment property come in to help make the process seamless.
1. Keep Your Debt Manageable
It's normal to take on debt when purchasing a first investment property, but new investors will want to make sure their existing debt is under control before making the commitment. Having too much outstanding debt can make it harder to qualify for a mortgage, and you don't want to take on loans that you'll have trouble repaying.
That means looking at all current debts, including car loans, student loans, credit cards, etc., and making an appropriate debt repayment plan if needed. If an investor is holding a lot of high-interest consumer debt, it may make sense to delay purchasing an investment property until the debt is in a more manageable place.
2. Build a Rental Emergency Fund
Many investors are savvy enough to know they'll need to make a down payment and cover closing costs and other real estate fees. But something can go haywire and require a repair at the rental, just like something can go wrong at someone's primary residence. That means establishing a new emergency fund is key.
Many real estate investors recommend a rental property emergency fund that covers three to six months' worth of expenses, including the mortgage payment, taxes, etc. That way, the account can cover cash flow if the place isn't rented for a few months.
3. Think Heavily About Location
When it comes to real estate, location is king. Investors looking for a first property may be inclined to look at more "up and coming" areas, which is a great strategy for getting a place cheap.
It's worth spending time to find a great location as it can determine everything from how the property is run (Airbnb, long-term rental for college students, etc.) to what the investor can expect to sell for down the line.
4. Get Insurance in Check
There are several kinds of insurances someone should consider when they purchase a rental property. Of course, homeowner's insurance tops the list as it's required by many mortgage lenders. But other kinds of insurance like landlord insurance and life insurance are worth looking at too.
A whole life insurance policy can provide a death benefit payout, which could help cover the remaining mortgage if the policyholder passes away before it's paid off, and this type of policy can accumulate an accessible cash value amount. And at a time when a lot of money may be flowing out, extra savings are never a bad thing.
5. Decide if Landlording Is on the Agenda
Real estate investors have options when it comes to buying a first investment property. They can manage the rental property themselves as the landlord or pay a property management company to do it.
It's worth digging into what being a landlord entails and the legal responsibilities associated with doing so. The cost of hiring a property management company could dig into profits, but the benefit of not having to worry about day-to-day management may end up being priceless.
The Bottom Line
Buying a first investment property is an exciting time. And when done properly, it can prove to be a fruitful financial move. Tips like paying off debt, building a rental emergency fund, finding the right location, getting insurance in check, and making a property management decision can help put any new investor on the right track.
Source: Northwestern Mutual