Thursday, March 28, 2024 / by Teresa Pileggi
Buying The Best Income Property: Top Factors to Consider
Buying The Best Income Property: Top Factors to Consider
Buying an income property is a lucrative idea, considering how the housing market has increased over the past few years. When approached keenly, the venture can provide a steady flow of passive income and long-term appreciation potential. However, like any other
financial commitment, investment properties are full of complexities that can be daunting for first-timers.
Are you ready to tap into the rental property sector and diversify your investment portfolio?
Besides the tax breaks and equity gains that come with rental property investment, there is a lot that dictates your success in the housing market. Here are the top factors to consider before you kickstart your journey.
Top 5 Factors Check When Buying an Income Property
Income properties are not built equally or with the same market dynamics in mind. This can make your search overwhelming, and you buy out of desperation. But with these factors at your fingertips, you easily land the best property with the highest returns.
1. A Good and Safe Neighborhood
The location or neighborhood where you buy your property determines your vacancy rates and the tenants you attract. A safe neighborhood will attract more tenants, and you can set high vacancy rates. On the contrary, unsafe neighborhoods will have an unreliable flow of
tenants with low vacancy rates.
Moreover, income properties near schools will need help maintaining full vacancies during closing days. On the other hand, rental properties in cities or commercially busy areas will have a steady flow of tenants looking for vacancies. Generally, buying an income property in a good and safe location is more enticing and has a higher potential gain.
2. Down Payment Differences
Income properties do not qualify for mortgage insurance and have stricter approval requirements than real estate properties. That means income properties have a long and complex process to secure financing. As a result, you will need a higher down payment of at least 20% when buying an investment property.
Various variables determine how much you place as your down payment. These include:
? Your credit score.
? Monthly or annual income.
? Debt-to-income (DTI) ratio.
Therefore, before going on a hunt, check your financial muscles to see how much you can put down as your down payment.
3. Fixed And Variable Expenses
Buying an income property is not a one-time cost – you will have to incur inherent costs to maintain and keep it safe for occupation. Fixed or variable rates will depend on your financing model, location, and market trends; these costs can be fixed or variable. You cannot always calculate these expenses accurately. However, budgeting for them beforehand can save the stress of ending up with negative cash flows.
Some of the fixed and variable expenses that come with investment properties include:
? Property taxes. Properties with long-term tenants have higher taxes.
? Property management expenses. To pay property management agencies if you will not manage the property yourself.
? Homeowner's insurance.
? Homeowner's association (HOA) fees.
? General maintenance costs include cleaning, repair, and landscaping costs.
4. Know The 1% Rule
Real estate investors use the 1% rule to determine whether investing in any income property is worth it. The rule requires investors to bring in at least 1% of the total monthly investment, which includes the buying price and any other additional cost incurred in maintaining the property.
For instance, if you buy a rental property for $500,000 and use $100,000 for repairs, the total investment becomes $600,000. With the 1% rule, the property should bring at least $6,000 monthly returns. However, the rule is not likely to work on properties in up-and-coming neighborhoods that do not immediately see substantial returns. In this case, you can
forget the 1% rule and focus on long-term gains.
5. Property's Capital Growth
Capital growth or long-term appreciation is the property's value increase over time. Analyzing the appreciation indicators can help you determine if the property will increase or decrease in value with time.
Therefore, when buying an income property, you need to ask yourself questions like:
? Has the median sale price of properties in the neighborhood increased in past years?
? What is the median rental income of the property?
? What is the average property appreciation rate in the area per year?
The good news is that Toronto has recorded a strong and stable property appreciation rate over the past two decades. That means that even with the costly investment process, your property will always increase in capital with time.
The Bottom Line
Buying an income property requires carefully considering various factors affecting its profitability. As a first-time buyer, you should evaluate such aspects as location, down payment, running costs, and potential appreciation to determine your chances of success. You can also consult real estate experts who will help you assess the property before buying to gauge your potential returns.
Buying an income property is a lucrative idea, considering how the housing market has increased over the past few years. When approached keenly, the venture can provide a steady flow of passive income and long-term appreciation potential. However, like any other
financial commitment, investment properties are full of complexities that can be daunting for first-timers.
Are you ready to tap into the rental property sector and diversify your investment portfolio?
Besides the tax breaks and equity gains that come with rental property investment, there is a lot that dictates your success in the housing market. Here are the top factors to consider before you kickstart your journey.
Top 5 Factors Check When Buying an Income Property
Income properties are not built equally or with the same market dynamics in mind. This can make your search overwhelming, and you buy out of desperation. But with these factors at your fingertips, you easily land the best property with the highest returns.
1. A Good and Safe Neighborhood
The location or neighborhood where you buy your property determines your vacancy rates and the tenants you attract. A safe neighborhood will attract more tenants, and you can set high vacancy rates. On the contrary, unsafe neighborhoods will have an unreliable flow of
tenants with low vacancy rates.
Moreover, income properties near schools will need help maintaining full vacancies during closing days. On the other hand, rental properties in cities or commercially busy areas will have a steady flow of tenants looking for vacancies. Generally, buying an income property in a good and safe location is more enticing and has a higher potential gain.
2. Down Payment Differences
Income properties do not qualify for mortgage insurance and have stricter approval requirements than real estate properties. That means income properties have a long and complex process to secure financing. As a result, you will need a higher down payment of at least 20% when buying an investment property.
Various variables determine how much you place as your down payment. These include:
? Your credit score.
? Monthly or annual income.
? Debt-to-income (DTI) ratio.
Therefore, before going on a hunt, check your financial muscles to see how much you can put down as your down payment.
3. Fixed And Variable Expenses
Buying an income property is not a one-time cost – you will have to incur inherent costs to maintain and keep it safe for occupation. Fixed or variable rates will depend on your financing model, location, and market trends; these costs can be fixed or variable. You cannot always calculate these expenses accurately. However, budgeting for them beforehand can save the stress of ending up with negative cash flows.
Some of the fixed and variable expenses that come with investment properties include:
? Property taxes. Properties with long-term tenants have higher taxes.
? Property management expenses. To pay property management agencies if you will not manage the property yourself.
? Homeowner's insurance.
? Homeowner's association (HOA) fees.
? General maintenance costs include cleaning, repair, and landscaping costs.
4. Know The 1% Rule
Real estate investors use the 1% rule to determine whether investing in any income property is worth it. The rule requires investors to bring in at least 1% of the total monthly investment, which includes the buying price and any other additional cost incurred in maintaining the property.
For instance, if you buy a rental property for $500,000 and use $100,000 for repairs, the total investment becomes $600,000. With the 1% rule, the property should bring at least $6,000 monthly returns. However, the rule is not likely to work on properties in up-and-coming neighborhoods that do not immediately see substantial returns. In this case, you can
forget the 1% rule and focus on long-term gains.
5. Property's Capital Growth
Capital growth or long-term appreciation is the property's value increase over time. Analyzing the appreciation indicators can help you determine if the property will increase or decrease in value with time.
Therefore, when buying an income property, you need to ask yourself questions like:
? Has the median sale price of properties in the neighborhood increased in past years?
? What is the median rental income of the property?
? What is the average property appreciation rate in the area per year?
The good news is that Toronto has recorded a strong and stable property appreciation rate over the past two decades. That means that even with the costly investment process, your property will always increase in capital with time.
The Bottom Line
Buying an income property requires carefully considering various factors affecting its profitability. As a first-time buyer, you should evaluate such aspects as location, down payment, running costs, and potential appreciation to determine your chances of success. You can also consult real estate experts who will help you assess the property before buying to gauge your potential returns.
