A great way to earn passive income or generate revenue from capital appreciation is through investment property. Typically, investment properties are owned by a single investor, a group of investors working together, or an investment company. Although the word “investment property” is often used interchangeably with “second home,” the two terms do not have the same meaning. Unlike second homes, investment properties are not used for personal purposes. Instead, they are exclusively used to produce income through rental payments, dividends, royalties, or interests.
Purchasing an investment property is not exactly a walk in the park. It involves investing a lot of capital and implementing the right strategy to get you the most returns out of your investment. Thus, you must first understand why you’re choosing to make this investment, so you can define your goal, as well as decipher how to bring this goal to fruition.
What are some questions to ask yourself before buying an investment property?
Here are four questions to help you make well-informed, rational, rental investing decisions, and ensure you make huge profit from your next rental property.
1. Can I afford to buy an investment property
Although the decision to finance the property through a cash
payment or a down payment is up to you, it’s still crucial that you have a clear grasp of how this purchase will affect your finances. Besides obvious costs such as the down payment, closing costs, and renovation fees that you have to pay, some hidden expenses could catch you unawares. These hidden expenses include property taxes, insurance fees, mortgage payments, maintenance fees, and so on.
2. What goal am I trying to achieve by buying this property?
It will be rather unwise to put a lot of money into an investment without having a goal in mind. Ask yourself why you want to make this investment. Are you buying this property to increase your monthly income through rental payments? Are you buying it to make a quick profit by flipping, or is this a long-term investment for you? Your answers to these questions will help you define your goal, which in turn will assist you in choosing the most suitable investment strategy.
3. What will be my investment strategy?
After defining your goal, you’ll have to decide on the most appropriate investment strategy to achieve it. There are a good number of investment strategies to choose from– each with different approaches and results. An example of an investment strategy is flipping. Here, an investor purchases a property, renovates it, then resell it for profit within a short period (say 4 to 6 months).
Another example is the “buy and hold” strategy which involves buying a property and holding on to it for an extended period. Investors that choose this strategy usually rent out the property while “holding” it. Renting out the property helps to generate a steady stream of income through rental payments.
4. Where will the property be located?
One of the significant factors that determine the value of an investment property is its location. Where will you want your property to be situated? Ideally, you should invest in areas that offer maximum security, proximity to places of interest such as supermarkets, schools and restaurants, good bus routes, and so on.
You can also decide on the prospective location of your property based on who you want your target market to be. For instance, if your target market is families with children, then you should consider investing in a property located in a serene, family-friendly neighborhood. Such property should also be close to parks, schools, health centers, and playgrounds.
Much like any other kind of investment, buying an investment property is not entirely risk-free. However, by asking yourself the right questions, you’ll be able to make plans that will effectively position you for success while avoiding the pitfalls along the way.