Not for the faint of heart: here’s how to buy your first investment property

Here, in this latest PIT guest piece, Ellen Klein - editor at Sleep Junkie - outlines how investors should buy their first investment property. 

Are you in the market for an investment property? Buying your very first rental property is a significant step for any aspiring investor. This is one of the biggest and most lucrative assets you can invest in. And, with some more time, effort and further investment, it can generate a healthy passive income for decades to come. However, before you take the plunge, it’s important to take things one step at a time.

You need to know exactly how to find a solid investment property, apply for a mortgage, and find reliable tenants to make your investment worth the money it demands. You also need to know whether the responsibilities of being a landlord suit your personal schedule and abilities. Although you can always hire a property manager or agent and handymen or repair experts to do the work for you.

Here is everything you need to know about buying your first investment property.

Is Buying an Investment Property the Right Move for You?

Buying a rental property should never be a casual decision made on the fly. There is so much to consider, from operating costs and mortgage expenses to finding prospective tenants, handling maintenance and more. Owning a rental property comes with significant risks attached, so you need to be sure that you are up to the challenge.

With that said, buying an investment property also comes with a number of unique potential benefits that other investments, like shares on the stock market, may not. You will have far more influence over your investment property, and even simple upgrades like minor repairs or renovations can improve your likelihood of attracting high-paying tenants.

Securing a Mortgage for an Investment Property

One of the first questions you need to ask yourself when considering the purchase of an investment property is how large an investment you can realistically afford. Use a mortgage calculator to start drafting how much monthly repayments, stamp duties and rates will cost you. Then, apply for pre-approval to check how significant of a mortgage you qualify for.

Remember to make it clear that you plan on purchasing an investment property. This investment is governed by different rules to those that apply to primary residences.

The Importance of Taking a Mortgage

If you can purchase a property in cash, it may still benefit you to take out a mortgage, especially if you plan on buying multiple investment properties. Let’s say, for example, that you have GBP100,000 in your bank account. You could buy a home in cash for GBP100,000, and while you will enjoy a larger cash flow on your investment, it solidifies your cash in a single asset.

However, if you take a loan with a 20% down-payment, you could potentially purchase another property or two at a similar price with the GBP80,000 that remains. While your immediate cash flow

might be lower, these returns will grow in the long run as your mortgage is paid off and rent increases. This allows you to build assets at a faster pace when compared to buying a house for cash.

Start by Gaining Pre-Approval

One of the biggest errors that potential buyers make is hunting for the right investment property before ensuring that they can secure financing. If you only apply for a mortgage after you have found your perfect property, chances are the house will already be under contract from another buyer by the time you secure funding.

If you are pre-approved in advance, however, you will be able to take advantage of an excellent deal the minute you see it—and you will also know exactly what budget you have at your disposal. You can then decide whether you’ll rent the property out as is or if you have money for renovations. You can also decide whether it’s in your budget to furnish it, or to semi-furnish it with basics like kitchen appliances, beds and mattresses, and couches.

Check the Requirements

The agency loans available to property investors will either be adjustable-rate mortgages or fixed-rate mortgages. Both of these mortgage types have specific requirements when it comes to credit scores, down-payments and other key factors.

Generally speaking, the minimum down-payment on a single-unit investment property is 20% using a fixed-rate mortgage. However, if your credit score is particularly high, you may only need to put down a 15% deposit on the same property. For an adjustable-rate mortgage, you will likely need to pay a down-payment of at least 15% on a single-family home.

You will also need to meet other bureaucratic requirements as stipulated by local regulations. Most investors are required to provide at least 2 years’ worth of tax returns and 2 months’ worth of bank statements to their mortgage providers, and to have their assets verified. Your provider may require you to have at least 6 months’ worth of mortgage payments in reserve to cover expenses should you encounter unexpected financial obstacles.

Determine Your Property’s ROI The key to finding a great investment property is to ascertain whether or not you can actually make money from your investment. You will need to consider the return on investment (ROI) of your property to determine how much money you stand to make from it.

Calculate this ROI by determining the property’s net annual income, which is the rent money left over after insurance, taxes, property management fees, expected repairs, homeowner’s association fees, potential vacancy periods and other expenses.

Find the ROI by taking this annual income and dividing it by the amount you originally spent on the property. For example, if you spent GBP100,000 on your property and the net annual income is GBP8,000, your ROI is 8%.

Research Is The Key To Successful Investing

There’s a myriad of variables to consider when looking for your first investment property. The best way to start the process is by doing as much research as possible to ensure that you are making a choice that will benefit you in the long term.

Research neighbourhoods and housing prices, save up for your down-payment and ensure that you are pre-approved for a mortgage so that you can pounce when the right opportunity presents itself.

*As an editor, Ellen Klein covers topics such as financial management, risk management, real estate, as well as health-related topics. She’s a realist and believes that planning for life’s unknowns is best. When she’s not busy with volunteer social work, she can be found scribbling away at her keyboard.