Real estate investments provide the perfect vehicle for increasing your monthly cash flow, growing your net worth, and achieving financial independence.
But investing in a property is a big decision. Before you make the leap to real estate investor, you need to make sure you’re ready to handle everything that comes with that title.
Here are three questions to ask yourself to help you decide if you’re ready for your first investment property. How many of these can you say yes! to?
- Are you financially stable?
Unless you’re comfortable taking on more risk with creative financing, you’re going to need to have your finances in lender-ready order before purchasing your first investment property.
Income. Do you have enough verifiable income to qualify for a loan on an investment property?
Savings. To purchase your investment property, you’ll need enough money to cover the down payment and closing costs. Plus any renovations that need to be completed before the property can be rented. And you’ll want some money in reserve to cover vacancy and maintenance issues as they come up.
Debt. Your debt should be well under control before you invest in a property. If you have any high-interest debts (mainly credit cards, but some auto loans and student loans can also have high interest rates), pay those down before you add a new mortgage to your debt.
- Do you have good credit?
Lenders use a different credit standard for investors than they do for buyers purchasing a primary residence.
Because you won’t have the same attachment to your investment property as you do to your own home, lenders are taking a greater risk in lending for investment properties. So they naturally require more reassurance. Plus a higher credit score offers some reassurance that you will repay the loan.
Credit requirements vary by lender, but you should aim to have a fairly high credit score (around 720) before applying for a loan to purchase an investment property.
3. Do you have time?
Most real estate investments require a time commitment. But the time commitment largely depends on the property’s use.
Short-term vacation rentals can require a substantial, ongoing investment of time. The high turnover rate means you’re actively involved in preparing the property for each new guest every few days. But you’ll be rewarded with higher nightly rates. In fact, the increased rates may justify hiring a property manager to manage the unit for you, substantially reducing your time investment.
Long-term rentals are another way to reduce your time investment. Once your well-qualified renters move in, your only job is to collect the rent each month and address any maintenance issues.
Many of us mistakenly believe that real estate investing is reserved for the upper class. But if you are financially stable, have good credit, and can invest a little time, you are ready to join the elite group of real estate investors!
Interest rates are rising, so don’t wait to purchase your first investment property.