Q. What should I know before buying my first investment property?
A. There are two ways to approach investing in real estate: 1) Buy and Hold and 2) Flip. For someone’s first investment property, it is generally better to start with a residential property where you collect rent from a tenant. The key with a buy and hold property is to ensure there is positive cash flow and potential for price appreciation.
Location is critical. If you intend to actively manage the property, you should select a property that is relatively close to where you live. If you plan to use a property management company to look after it for you, location becomes less of an issue. But keep in mind, the management fees will affect your cash flow.
In general, a good property for beginners is a residential dwelling or a condominium. Condos are low maintenance because the condo association handles external maintenance and repairs, but you would still have responsibility for the interior. However, the monthly condo fee needs to be considered as it makes it harder to generate positive cash flow.
For appreciation potential, you want a good location with stable jobs but you are also looking for a property that, with a few cosmetic changes and updates, will attract better tenants and higher rents. Keeping your investment property in good repair will also raise the value of the property for when you decide to sell.
For cash flow, you have to consider all your potential expenses. Take the expected rent and subtract your mortgage payment, property taxes, insurance costs, management/condo fees (if any), and a generous allowance for maintenance and repairs. You also need to factor in a vacancy rate; these are the periods where the property is not rented. A “safe” estimate is 75% occupancy/25% vacancy.
Once you have a cash flow estimate, you can calculate your return on investment (ROI). Most investors are looking for an ROI of at least 5% or above.