Property Investment Kick-off: What to Consider Before You Buy!
Thinking about investing in real estate? You don’t have to tackle the challenge alone! As always, I am here for tips, first-hand experience, and counseling along the way. I regularly provide investing guidance over on my Instagram channel, so hop over to IG for plenty more.
For today’s investment tip, let’s break down the processes and considerations prior to making an investment on a second property. We’ll be discussing loan types, calculating expenses, picking the right location, and more. Let’s get started!
CONSIDER YOUR “WHO”!
Property investing doesn’t have to be a solo endeavor. The benefits of investing with a family member, friend, or partner include payment flexibility, support of responsibilities, added perspective, and so much more.
Recently, I worked with a repeat client who decided to purchase another investment property — this time with his sister! Their agreement was that his sister would live on one side of the duplex, while they share the rental income for the other side. In this case, I suggested they clearly line out how the property will be managed and how income and appreciation will be split. In some cases I suggest an attorney to make sure all parties are clear on the setup. In some cases, a real estate partnership agreement is prudent, which clearly states how property management is split and what happens when one or all parties want to sell.
CONSIDER YOUR “WHERE”!
Location is everything! I have said it before, and I will say it again. Return on your property investment is heavily reliant on the neighborhood’s demand, distance to amenities, and the condition of the property compared to those surrounding it. Consider the neighborhood proximity to grocery stores, restaurants, parks, and transportation. Additionally, if you find the perfect property, but surrounding properties aren’t up to par, the overall value of the property may suffer or there may be potential for more appreciation over time.
DON’T FORGET ABOUT INSPECTIONS
Real estate, especially in Portland, is still adjusting to life post-lockdown. So much of the home buying process can and is being conducted online. Now that you can view dozens of photos and watch virtual home tours, it may be tempting to put down an offer on a home without visiting it in person.
My major takeaway for you today is to never skip inspections if you can help it. Always hire a licensed inspector to inspect the home’s foundation, plumbing, electrical, HVAC, etc. Save yourself the headache of unexpected maintenance and renovations! Portland’s Home Gnome Inspections are a fantastic resource.
FINANCING YOUR INVESTMENT PROPERTY
Property investing is a brilliant way to generate additional passive income, but unless you have the cash readily available for a hefty down payment, the first step is acquiring an investment property loan. What loan type best fits your goals and current circumstances?
1. Conventional Bank Loan
Adhering to Fannie Mae or Freddie Mac guidelines, down payments for an investment property will be 25% or more, often leaning towards the higher end for investment properties. Lenders will analyze your credit history and may expect you to have 6-months of payments saved prior to acquiring the loan.
Recent changes have been made to second-home and investment mortgages under Fannie Mae guidelines. Check out my recent blog for all the details.
2. Fix-and-Flip Loan
Passionate about designing and/or flipping homes, like me? Fix-and-flip loans are essentially hard money loans, ideal for borrowers who intend to wrap up renovations and put the property back on the market quickly. Fix-and-flip loans are easier to qualify for compared to conventional bank loans as they are lending based on the property potential and not your credit. However, down payments are required, interest rates are much higher than conventional bank loans, and extension fees will be applied if renovations extend past the estimated date.
Pssst… it wasn’t a property flip, but Brent and I recently completed a home build. If you’re interested in home design or flipping a property, check it out for some inspo!
3. Drawing From Home Equity
A great alternative for long-term rentals or a long-term investment flip for current homeowners. Home equity loans allow you to borrow against the equity of your home, sometimes up to 80% of your current home’s appraised value. The major benefit of a home equity loan is securing a fixed interest rate for the life of the loan. However, remember that borrowing from your home’s equity essentially makes your home collateral if loan payments aren’t made.
REMEMBER TO CALCULATE EXTRA EXPENSES
Beyond securing an investment loan, what is left on your operating expense checklist? Even if you are not renovating the property and choose to rent as-is, make sure to factor in these ulterior expenses:
Landlord insurance — often 25% more than homeowners and occupant insurance.
Property taxes — Oregon’s property tax calculations are complicated. Check out this overview of our tax system.
Homeowner association fees — 13.1% of Oregon homes are part of HOA communities.
General Maintenance — average cost of home maintenance lands between 1%-4% of your home’s value. Check out my blog on Annual Home Maintenance Tips!
And, of course, mortgage payments.
THE BREAKDOWN
Before you begin the process of securing an investment property, make sure you consider the following:
Partnerships — Are you investing with a partner? Consider the pros and cons, and reach out to an attorney if with questions.
Location — Analyze local neighborhoods with this analytic tool and utilize my recent blog!
Inspections — Make sure to view properties in person and rely on a professional property inspector to avoid major structural, electrical, and plumbing issues.
Financing — Which loan type is right for your situation? Conventional bank loans, fix-and-flip loans, or home equity loans?
Extra Expenses — Keep landlord insurance, property taxes, HOA fees, and general maintenance in mind when budgeting beyond loan payments.
Property investing has long been a passion of mine (can you tell?) From turning our first home into our first investment property, building our second investment property, and helping the Portlanders like yourself find investment properties of their own, I love it all. If you are interested in investment opportunities, get in touch and stay tuned for more tips!