There is nothing quite as exciting as buying your first investment property. (It was certainly true for my and my wife's story of our first buy in Denver's Capitol Hill.) Purchasing a rental can seem complicated and maybe out of your budget. But it's not. And when you sign the papers, you will be so proud of taking that step toward securing your financial future.
Probably your biggest questions are how to pay for a property's down payment and how to find one. Here some tips.
How to pay for an investment property
If you've saved well or have a well-to-do (and generous) relative, then paying for it in cash is always an option, though in terms of return-on-investment, it may be best not to do so.
(Read the power of investment section for more information on this.)
Use what you got
Do you already own a primary residence in Denver? Many investors got their start by using the equity in their home to put a down payment on their first rental property.
A home equity line of credit, or HELOC, is the most common tool. If you have decent credit, most banks and credit unions will give you a HELOC somewhere between 70 to 80 percent loan-to-value, or LTV. Usually, you calculate this by taking the current appraised value of your home, multiplying it by the institution's maximum LTV, and then subtracting from that number the current loan balance on your home.
Live in it for a year
Another option for lowering your down payment on an investment property is to not buy an investment property. Let me explain.
Lending institutions require 20 percent down for a rental. For a primary residence, they require only 5 percent down (or sometimes as little as 3.5 percent if you use an FHA loan). Why? Because lenders think that if things go south for you, you're more likely to continue paying your mortgage on a home you live in than a home you don't.
So one way around the 20-percent-down requirement for investment properties is to live in it for a year. If you intend for a house or condo to be your primary residence, then many lenders will allow you to put down only 5 percent.
How to find an investment property
Okay, so you know how you'll pay for your rental property. Now you need to find the right place.
Go with a pro
The easiest way to find a good rental is to use a real estate agent who specializes in investment properties. (Wink, wink, contact me.) They'll know what areas are hot for rentals, what the amenities are that appeal to renters, and the right questions to ask.
(For instance, you need to ask any condo building what percentage of their units are owner-occupied. Some have restrictions on that percentage, and you don't want to close on a rental property only to learn that ... oops, you're not allowed to rent it.)
Go with letters
Instead of waiting for the perfect rental to come online, you could seek one out yourself. Do you know areas you like? A few condo buildings that have great amenities or good views?
As I discuss in greater detail in our story, you can find the owners of places you like and simply send them letters telling them you want to buy their place.
It can work, but it's also a lot of work, researching addresses, writing letters, stuffing envelopes and licking stamps.
Go it alone
You can use public websites to search for homes and try to contact the selling agents, but there are a few pitfalls.
One, most sites are delayed in getting new listings up on their page. By the time you see your favorite condo or home, it may have been on for a few days, and in a hot market like Denver that can mean numerous buyers have already submitted offers.
Two, unless you've done a lot of deals, you're at a disadvantage when dealing with a professional seller's agent who knows comps and knows the ins and outs of the contracts.
Feeling a little more confident? Great! Contact me today to take the next step toward your investment empire.
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