Are you planning on buying an investment property in 2021-2022? If so, real estate continues to be one of the smartest investments in the 2020’s, especially as the stock market heads into uncharted territory and everyone things that the bubble will burst soon.
Thankfully, with real estate, you can earn predictable income but, you also have to know what to look for before purchasing your property.
HOA fees can play a big role in whether or not an investment property can turn a profit. Some HOAs can run upwards of $500 or even $1,000 per month or more, which when combined with a mortgage and other expenses can make profitability doubtful. Of course, you also don’t want to buy an investment property with HOA fees so low that the property managers can’t keep the place maintained. A good HOA will keep a property attractive to prospective renters without unduly burdening its owners.
Your mortgage and HOA payments aren’t the only costs you’ll incur on a monthly basis when you buy an investment property. Property taxes can actually be quite a large portion of your monthly cost of owning an investment property. Even worse, property taxes typically go up every year. Fortunately, property taxes are typically deductible on your tax return. However, you’ll still have to budget for them every month.
Real estate is often said to come down to “location, location, location,” and this is true for investment properties as well. The neighborhood your investment is in will play a big role in whether or not you can turn a profit. Think about it this way -- when you’re on vacation, would you pay top dollar for a rental property in a run-down, dangerous neighborhood? Similarly, would you be willing to pay a premium for a rental in an upscale part of town? Even if you’re not planning on renting out your investment property, location will play a big role in how well your investment performs over time.
The size of your down payment can play a big role in the return you get on your investment property. With a small down payment, you may have to pay a higher interest rate on your mortgage, and you may also be saddled with private mortgage insurance, or PMI. These are both costs that can eat into your profit margin. A higher down payment will also obviously require a greater cash outlay upfront, which could limit your flexibility to cover costs for things like maintenance or repairs.
Potential Rental Income
If you’re looking to rent out your investment property, probably the most important number to know is how much potential rental income you can earn. You can make a good estimate of your income potential by verifying what comparable rentals in the area charge and by talking to a good real estate agent. Bear in mind that short-term rentals can usually pull in higher rates than long-term rentals, but that income can often be highly seasonal.
Whenever you buy an investment property, you’ll have to budget for improvements. Some properties you’ll want to remodel right off the bat, while others you’ll have to maintain and improve to counter the effects of wear and tear over time. All of these costs will eat into your profit margin -- although well-done renovations can actually improve both your property’s value and its potential for rental income.