4 Things to Consider Before Purchasing Residential Investment Properties

Residential real estate is a great way to earn extra income. Investment properties can create extra cash flow, which can supplement an income. Depending on what sort of plot is invested in, there are potential tax benefits and opportunities to diversify investment portfolios. But residential real estate is not something that should be undertaken lightly. Here are some tips to ensure that a venture is a sound decision that will increase equity:

Look at Landlord History

Some banks or services that supply real estate loans require what is called a “landlord history report.” This is evidence that the party interested in taking out the loan has at least two years of experience managing a rental property. The evidence required is often tax or bank statements that demonstrate a certain amount of income is supplied by rental property returns. Before taking out a loan, check with the loan provider to see if this is a requirement.

Determine a “Cap Rate”

A capitalization rate, or “cap rate,” is a percentage that demonstrates the projected annual returns on investment properties. The cap rate is determined by subtracting normal expenses related to the asset – taxes, utilities, insurance, and repair costs – from the annual income, then dividing that number by the total price of the plot.

A good cap rate generally falls between 4 and 10 percent. If you are living in a high-demand area where there are more renters than rentals, you should expect a lower cap rate. Conversely, if you are living a low-demand area, you will want the cap rate to be on the higher end, to allow for income lost to vacancies.

Decide Distressed vs. New

Distressed, dilapidated, or otherwise declining buildings can be a great opportunity for big returns. They are often much cheaper than newer, more well-furnished buildings, and, with the right tools and expertise, many repairs can be undertaken by the potential owner. When considering distressed investment properties, try not to underestimate the cost of repairs or overestimate your ability to complete them. This can lead to lower returns on a venture. Be sure to factor in time as well. If you don’t have the ability, or the time, to complete the repairs yourself, it might be a better decision to buy newer real estate.

Find Funding

There are several avenues through which a potential venture capitalist can find funding for their investment properties.

Taking out a loan through a bank or company is one of the most common ways to finance a piece of real estate. The loan will cover the majority of the value of the plot, with the buyer required to front about 20 percent of the value at closing.

If your credit score is low, a loan might have too high of an interest rate. If you plan on living in one of the units of your building, you can receive an FHA 203(k) loan. This is a loan that provides a fixed-rate mortgage and cash for improvements to a property.

Good investment properties can provide increased cash flow for years to come, and great equity. When searching for the right one, have a plan in place for financing, managing, and potentially repairing whatever real estate you invest in.