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First, what is the goal?
Before searching Zillow or touring properties, answer one question: what do you want this property to accomplish? Different goals can lead to completely different purchases.
Five common investment goals
Monthly Income
You want rent to cover as much of the property's monthly expenses as possible and ideally generate positive cash flow.
Long-Term Appreciation
You are willing to accept lower immediate cash flow in exchange for owning real estate in a location you believe has strong long-term desirability.
Family Use + Investment
Children, parents or other family members may use the property periodically, while it is rented during other periods. This requires additional planning because personal use can affect financing, taxes, insurance and rental strategy.
Future Home
Some buyers purchase an investment property today with the possibility of living there years from now. The question becomes: would we want to own this property even if our plans change?
Wealth Building
The goal may simply be to own another appreciating asset while a tenant helps offset the cost of ownership.
There is no single “correct” investment strategy. The important thing is knowing yours before deciding what to buy.
The process
The investment property roadmap
Sixteen steps from first conversation to long-term ownership. Click any step to expand it.
Capital
How much property should you buy?
Start with the money available for the purchase, then keep going, because the purchase is only part of the cost.
Up-front costs
- Down payment
- Closing costs
- Financing costs
- Initial repairs or improvements
- Furnishings, if applicable
- Reserves
Ongoing costs
- HOA dues
- Property taxes
- Insurance
- Vacancy
- Maintenance
- Property management
One of the most common mistakes
Putting every available dollar into the down payment. An investment property should have reserves. A broken HVAC system does not care that you just closed escrow.
Financing
Financing an investment property
Investment-property financing is different from financing a primary residence. Depending on the buyer and the property, options may include:
Conventional investment loan
A traditional mortgage specifically underwritten for a non-owner-occupied property.
Larger down payment
Increasing the down payment may improve the loan structure and lower the monthly payment. But putting more money down is not automatically the best investment decision. Consider what else that capital could be doing.
HELOC or home equity
A homeowner may be able to access equity from an existing residence to help fund another purchase. Useful, but it means borrowing against an existing asset, so understand the combined risk and monthly obligations.
Cash purchase
Cash can make an offer extremely competitive and eliminate financing risk, but buyers should still analyze whether tying up that much capital makes sense.
Delayed financing or refinancing
Some buyers purchase with cash and later obtain financing. This requires careful planning with a lender and tax advisor before the purchase.
Important
Loan programs, interest rates, reserve requirements and down-payment requirements change. Talk with a qualified lender before shopping so that we can evaluate properties using your actual financing structure rather than assumptions.