Global Advice Center

The Financial Impact of Buying an Investment Property

Posted on Apr 10, 2010 03:57:27 PM

Even more so than when buying your primary home, it’s important to have good credit if you’re looking into purchasing investment properties. Most banks require higher down payments for investment property, and will usually stick you with higher interest rates on the loan as well because you’re more likely to fall behind on your payments on an investment than on your own home.

Additionally, as mentioned before, there are risks you’ll need to consider and plan for when investing in property. Unexpected maintenance, insurance claims, and vacant units are all situations you should anticipate and save for in advance. In addition to cash savings, it’s also helpful to have large lines of credit or at least credit cards as an emergency reserve. Many people choose to open a HELOC, or home equity line of credit based on their equity in their place of residence. Be careful doing this though, because unlike credit cards and other lines of credit, a HELOC is secured debt–meaning if you fall behind on payments, your house could be claimed by the lender (just like if you fell behind on your mortgage). On the other hand, credit cards and most standard lines of credit are unsecured debt and therefore less risky in the case of financial catastrophe. However, these forms of credit will often involve higher interest rates to make up for the additional risk posed to the bank.

Also, as with adding any investment vehicle, make sure your entire portfolio of investments is diversified enough. In other words, you shouldn’t bank all your savings on real estate; a safer plan would be to also buy stocks and bonds, filling your 401(k) or IRA with them as much as possible.

When it comes to estimating the actual value of investment properties and making a suitable offer, many experts recommend not paying over 6 – 8 times the amount of rent you expect to make in the first 12 months, including the repairs you may have to make. It’s important, then, to determine not just the resale value of the property you’re considering, but also the average monthly rent you can expect to make from it. Investigate average rental prices for similar properties in the surrounding area, and the length and number of nearby vacancies. Then extrapolate from that information how long it will take you to fill your rental with renters, and how likely it is that you’ll have vacancy gaps after you get it up and going.