According to Rocket Mortgage, “an investment property is real estate purchased to generate income (i.e., earn a return on the investment) through rental income or appreciation.” Investment properties can be residential (single-family homes, multifamily properties, townhouses, condos, etc.) or commercial (retail space, office buildings, restaurants, etc.), though detached single-family homes are the most common type, per Nerdwallet.
Qualifications to Buy an Investment Property
If you’re going to finance your investment property purchase, you’ll need to meet specific criteria set by your lender. Rocket Mortgage outlined three signs that you’re ready to purchase an investment property:
1. You’re Financially Stable
Since investment properties are riskier for lenders than a primary home, you’ll need to be much more financially stable to purchase this type of real estate. After all, most people will default on their investment property’s mortgage before defaulting on the mortgage attached to their primary residence. As such, you’ll likely need to make a 15% down payment along with a healthy credit score (upwards of 620, in most cases). If you’re renting the unit out, you may also need to pass a home inspection.
Financial stability for investors translates into having enough money in the budget to cover both the initial home purchase costs, property management tools, and ongoing maintenance. Landlords must complete essential repairs in a timely manner, which can add up quickly, and tenants can withhold their monthly rent if you don’t fix broken utilities on time in some states. Additionally, set aside enough money to ensure you have resources available if your tenant is unable to pay rent for one to two months.
Once your finances are under control, speak to your lender about your purchasing power – you may even want to get pre-approved for a loan, though be sure to ask if the pre-approval has an expiry date.
2. You’ve Done Your Research
Armed with the knowledge of how much you can spend based on your loan, establish your investing strategy. Ask yourself the following questions:
- Are you looking to flip a property, or are you interested in something more turnkey?
- Are you targeting any specific tenants (such as college students, seasonal workers, etc.)?
- Are you interested in short, mid, or long-term rental agreements?
- What amenities are required for your rentals?
Once you understand your game plan, start researching neighborhoods near you. Look for locations that support your goals. For example, if you’d like to rent your property to students, look for real estate near a local college.
Then you can start evaluating properties within your target neighborhood. The goal is to find an investment property that maximizes your return on investment (ROI) while allowing you to maintain whatever level of involvement you’d like with the day-to-day operations of your rental business.
If you’d like to evaluate the ROI of a potential property, TurboTenant offers a free rental property calendar that can help you analyze each deal.
3. You Have a Plan to Manage the Property
Passive income won’t come rolling in simply because you’ve purchased an investment property; someone has to manage the daily operations and monthly rent collection in addition to fielding maintenance requests and tenant questions.
While leveraging a property management tool built by landlords for landlords can streamline your business processes, you’ll still need to decide whether you’ll be the point of contact for the unit or if you’d rather higher a property manager. Just be sure to factor in the cost of the property manager’s salary into your ROI calculations if you decide to go down that route. If you decide to take on the landlord role, study your local landlord-tenant laws along with the Fair Housing Act to ensure your business complies with these specific standards.