Buying your first investment property is a big step. And, as many real estate investors can attest, it can be your first step toward generating a substantial passive income and wealth. But the investor road is littered with pitfalls and challenges, so you at least need to know the basics before buying that first property. Find out what you need to know with this brief guide on how to buy your first investment property in Northern Colorado.
Make Sure It’s Right for You
Before taking the big step of buying an investment property in Northern Colorado you need to make sure it’s right for you because it’s not an undertaking for the faint of heart. Not only will you have to come up with mortgage payments and operating costs, but you’ll also have to deal with tenants and/or reselling the property. Are you ready to take on this responsibility?
There’s also the financial risk involved. Buying a rental property, for example, carries more risk than investing in the stock market. For there’s always the possibility that you’ll get stuck with bad tenants who don’t pay on time or at all. But there’s also the potential for a bigger payoff with real estate investing, which usually accompanies greater risk. Just make sure you understand the risk-to-reward ratio and that such a move is right for you.
Determine the Property’s Potential ROI
When considering a potential investment property, you first need to determine whether it has the potential to actually make you any money – that is, what the potential return on investment (ROI) is. If it won’t make money for you, no matter how attractive it is in every other way, then it won’t be a good investment.
To calculate the ROI for a rental property, you first need to find the property’s net annual income. This will be the amount left over from total collected rents after subtracting insurance, taxes, management fees, expected repairs, potential vacancies, HOA fees, and utilities. (Not all of these will always be applicable, but it still gives you an idea.) Then, take the annual net income you arrived at and divide it by what you will pay for the property.
Suppose, for example, you paid $100,000 for a property, and the annual income is $7,500. Dividing $7,500 by $100,000 gives you an ROI of 7.5% – which is more than you’d likely get in the sock market, so probably a good investment.
This can get pretty involved, so contact a Northern Colorado agent if you have any doubts about a property’s potential ROI. Just call (970) 599-0011 to discover more.
Get Pre-Approved Early
You also want to get pre-approved for a mortgage before you ever begin searching for an investment property. If you don’t get pre-approved first, you could lose out on a good investment property. If after finding a good property, you have to wait around for pre-approval, the property may wind up being under contract to another buyer. You want to be able to jump on a good deal immediately when you find one.
In addition, without pre-approval, you won’t know exactly how much of a loan you can qualify for. How disappointing would it be to find the perfect investment property only to find out that you can’t borrow enough to purchase it? Having a pre-approval letter in hand will allow you to shop wisely and to be perceived by sellers as a serious buyer.
Build Up Cash Reserves
Investing in real estate inevitably means facing large, unexpected expenses occasionally (or possibly often). Before buying your first investment property in Northern Colorado then, you need to have the cash reserves on hand to handle these expenses.
If, for example, you buy a rental property, you’ll need money in reserve to make repairs and to keep you going when you have vacancies. To ensure that you make it through these rough patches, it’s a good idea to contribute a percentage of your cash flow each month to a dedicated cash-reserves account.
Don’t Try to Do It All on Your Own
Possibly the most important aspect of buying your first investment property in Northern Colorado is something you should not do. And that is trying to do it all on your own the first time. A Northern Colorado agent who has experience with investment properties can provide the guidance you need to avoid the not-inconsiderable pitfalls. So when it comes time to buy your first investment property, be sure to contact us today at (970) 599-0011.