Before You Dabble in Investment Property, Here’s What You Need to Know

That last vacation you took when you rented a house as opposed to the pricier hotels and condos? That was an investment property, and although you probably saved some money, the bill you received might have gotten you thinking about dabbling in investment property yourself. It’s a great avenue to explore if you’re in a secure financial situation, so here’s what you need to know in order to make a smart, successful investment.

Calculate Some Numbers

An investment property generates income, but it’s a slow process, so don’t blow your budget thinking you’ll earn it back instantly. You need to calculate some numbers, but don’t worry — it’s simple and follows an equation. First, you need to know how long it will take your property to pay for itself, so calculate the gross rent multiplier (GRM) by dividing the market value of the home by the estimated gross annual income. To find that annual income, calculate the monthly rent using the 1 percent rule. In an ideal scenario, the monthly rental income should be at least 1 percent of the amount you paid for the investment property. However, if your home needs a lot of work, you might want to follow the 2 percent rule. These are just a few of the basic calculations, and they are meant to be more of a guideline, but you can crunch some serious numbers using an online investment calculator.

Decide on Your Financing Route Early

Unfortunately, mortgage insurance isn’t an option with an investment property, so you’ll need to come up with a decent down payment (at least 20 percent). Plus, you’ll need to have a good credit score (at least 740), as anything lower could mean a higher interest rate. Banks will typically want to see that you have at least half a year’s worth of reserves on hand in the bank to pay expenses related to your rental property. Considering these factors, you might be wondering how you’re going to pull this off, but there are several financing options for you to look into, such as a mortgage loan, home equity loan, or a partnership.

Location Is Important

Don’t let all this talk about numbers keep you from taking into account another significant factor in an investment property’s success: the location. A high cash flow is tempting, but remind yourself that this will change over time. As Bigger Pockets explains, a property in a less-than-desirable location tends to experience huge changes in value, “and these investments typically become a race against time to recover fully before the next down cycle arrives.”

When you’re looking at investment properties in Los Angeles, all the options available can make it a little overwhelming. Which location is best? That all depends on what you think your renters want to see. As Turnkey points out, if beachfront views are your draw, then the only issue you’ll have is deciding which beach to choose whether it’s Santa Monica, Long Beach, or Venice Beach. Perhaps you’d like a property close to the action in Central LA, or maybe you would prefer to offer renters a quiet escape in the San Fernando Valley.

Make the Necessary Updates

If you’re not able to overlook the dated appliances and gaudy wallpaper, your tenants won’t either. Make upgrades so that you can please tenants, justify your rental rate, increase your property value, and bring in good reviews. You don’t have to do any serious demolition; paint the walls, upgrade appliances, pull out carpet, put up a new front door, and add landscaping. Safety should be a priority as well, so invest in some smart home technology such as security systems, locks, smoke alarms, and doorbells to not only give your tenants peace of mind, but you as well.

Investment property is a new avenue in the real estate world. If you want to explore it, start with the numbers first before you get into the details. Should your finances and calculations point to a sound investment, call your local realtor to get the ball moving.

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