Many know that investment properties are outstanding sources of income; what many do not know is that a great deal of financial preparation and savvy go into properly securing rental real estate. Budget management is a significant part of being a successful investment property manager, so by following three easy tips, you can ensure you are protected while turning a profit as a property investor.
It’s relatively common knowledge that investment properties are excellent ways to bring in extra income. Additionally, property generally appreciates in value, so one day, you will be able to profit when and if you choose to sell your property. The most difficult part of owning an investment property is getting started. Most have to finance their investment property as few have the money to buy the property outright and even fewer receive the property as a gift.
Securing a Loan
To finance the investment property, you will need to secure a loan. Generally, there are two types of loans: residential and commercial. Unless you are buying a complex or something that has more than five units, you will most likely get a residential type of loan. To be able to secure your loan, you need to have your financial affairs in order. This means:
- Have a solid debt-to-income ratio: While most have some debt, the less debt you have, the better; this indicates to the lender that you can pay your loan regardless of if or how much income the property is drawing.
- Be prepared to make a substantial down payment: A “good” down payment is 20-25% of the loan value.
- Have a strong credit score: Aside form helping keep interest rates low, your credit score communicates your credit history. At minimum, you should have a 700.
- Be able to document property management experience: Some financial institutions require at least two years’ proof of property management experience.
National and local lenders have different standards (i.e., different credit thresholds or proof of management experience, for example), so if you do not qualify with one institution but know you have the income and fiscally responsible nature to manage a investment property, talk to other institutions and see what your loan options are.
Some institutions will allow you to use the equity from your primary residence or will allow you to take out a second mortgage or line of credit against your primary residence to finance your investment property. While this presents an option for you to get from Point A to Point B, it is one to be wary of as it puts everything you have up as collateral for the investment loan. Ideally, you will be able to secure funding that does not require you to put your existing assets on the line.
Protect your Assets
Getting the Right Insurance
One thing you may not know is that you can’t get mortgage insurance for rental real estate loans; rather, you’ll need landlords insurance if you’re planning to use your investment property for short-term rentals. The location of the property dictates the type of insurance you’ll want to procure. If your investment property is on the Florida Panhandle stretch known as 30A, you’ll want to have insurance that covers:
- Client and natural disaster damage
- Personal injury (if a vacationer is injured on the property)
- Legal fees and counsel (if you are taken to court for whatever reason)
- Income loss
Additional considerations for your insurance policy should be taken into account if you are renovating or if the property is going to be without occupants for a prolonged period.
Use your real estate agent as well as an attorney or real estate attorney with experience in working with clients with investment properties. They can help you establish the right holding structure for your investment property. Usually, this is a limited liability company (LLC), depending on the circumstances. If you do not structure your purchase appropriately, you run the very real risk of losing your existing home and assets if issues arise such as default or legal action against you and your rental property.
- Business taxation – Because an LLC is taxed as a “pass-through” entity, you will not be doubly-taxed; rather, profits from your investment would be “passed through” to you to be paid at a your regular tax rate.
- Asset protection – In the event that you lose the property due to failure to pay the mortgage note or are sued or if there is some other tragedy that makes you financially, your primary residence and family assets (savings accounts, additional property, etc.) will be immune from legal action. The protection offered by this separation provides much needed peace of mind to investors.
By protecting your assets, no matter what type of property you have whether it’s a single-family cottage or a condominium, you guarantee that you will be covered if there are setbacks as an investment property owner. By getting the right type of financing, having insurance proper for the property and the area the property is located in, and protecting your assets with an LLC, you can become a savvy investment property owner whose only worries will be whether or not you should get another investment property.
The pristine sugar white sands and emerald and turquoise hued ocean waves of 30A on the Florida Panhandle are an idyllic place. While many are so attracted to this scenic slice of heaven that they end up calling it home, many more annually flock to the charming communities of 30A for vacation, which is why it’s a perfect place for an investment property. If you want to become an investor and own a piece of paradise, contact local, coastal living expert, Melissa Clements, who will be more than happy to help you find the beach house, cottage, or bungalow of your investment dreams.