7 Things You Need to Know About Investment Properties
Updated: May 23
We exaggerate. This story certainly won’t encapsulate everything you need to know. But we are here to help, and as our superb city continues to grow, more and more folks will continue to look at the benefits of capitalizing on investment properties. For some, it may be a cabin in the woods, for others a multi-family home, but no matter the shape said property takes—or how much promising Airbnb potential it holds—we can assure you it will be a bit different from your average home-buying experience.
Here are a few helpful Homeworks tips and things to keep in mind if you’re considering expanding your real-estate portfolio:
Investment Property Tips
1. Lending matters:
Not all loans are created equal. If you already own a primary residence, your lending options will change as you add properties. Speak to a lender you trust about different (and often quite creative) programs that might be available to you as a borrower. Another good thing to be aware of: down payment requirements change with property type. For example, in many multifamily investment properties, a 25% down payment is not uncommon.
2. Local laws:
For many investment properties, accommodations platforms like Airbnb or VRBO are likely to be a primary source of income. We highly recommend checking local city and/or town ordinances prior to purchasing the property to determine whether the area in question allows for short-term rentals.
3. Rent affects value:
Keep in mind that the appraisal process for multi-family units looks slightly different from that of other homes, as appraisers will consider comparable market rents on similar properties.
4. On income potential:
This is measured in “cap rates” (aka capitalization rates). You can calculate this using a relatively quick/easy formula. First, subtract your expenses from the gross income—that will be your net income. Then divide the net income by the purchase price and move the decimal 2 points to the right to arrive at a percentage. This final number is your cap rate, and it can be particularly helpful when comparing different properties in your search. Talk to your real estate agent (*raises hand*) about current cap rates in the areas where you are interested in purchasing.
5. About the renters:
Existing leases in place with the former owners must be upheld until they expire. In other words, you may be taking on dreamy (or not-so-dreamy) tenants, so best to do your Homework (*wink*).
6. Buy then spy:
Oftentimes, offers are “subject to inspection,” which means if the property is tenant-occupied, you may not be able to see it in person until after your offer is accepted.
7. Pet proposal:
Roughly 78% of U.S. households have pets, so it might be in your best interests to consider being a pet-friendly landlord. In doing so, you’ll widen your rental pool, retain good tenants, and create the potential to make more money (pet owners will generally pay more or consider pet rent). The best part: allowing for pets in your rental reduces the chances that someone may be forced to surrender a pet to a shelter.