How to Score an Affordable Investment Property in 2022
- Real estate investment is a great way to build generational wealth, and with strategy and persistence, you can find an affordable property.
- Attending the home inspection gives you a tour of your property’s structure, roof and major equipment through the eyes of an experienced pro.
- Line up your financing before developing a long list of must-have properties.
Many people dream of becoming a real estate investor and earning passive income, but very few achieve it. By some estimates, only 3% to 4% of all adults in the United States (U.S.) are landlords. Yet, property investment, that is, owning a building or house and the land underneath it, is a tried and true path to wealth.
Real estate builds wealth more consistently than other investment avenues because of three unique features:
1) Low Cost to Play
First is the low cost to play in the industry: the ability to secure a loan for a significant portion of the property cost. Most other investment opportunities, from stocks and crypto, to starting a new business, require you to front most, if not all, of the funds needed to purchase the asset. Real estate, however, can be bought using leverage, or a loan, of 80% or even more in some cases.
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2) Low Cost of Financing
Second is the relatively low cost of financing. The interest rate for loans secured with real estate is significantly lower than other new businesses, particularly if the company does not have any collateral to pledge.
3) Cash Flow
Although bonds and certain classes of stock provide a dependable return on day one of purchase, they don’t offer a range of cash flow options. On the other hand, real estate provides a full-course menu of possibilities that can be used, depending on market conditions and risk tolerance.
If your city will see surging tourist demand due to an upcoming multi-week event such as the Summer Olympics (hosted by Los Angeles in 2028) or the World Cup (coming to several cities in the U.S. in 2026), renting your property by the couch, by the room, or as one unit can offer significant returns.
If you prefer the stability of a routine income stream without the volatility of here today gone tomorrow swings, then renting to a built-in customer base such as traveling nurses or a family via a long-term lease are great alternatives.
Finding an Affordable Investment Property
While there are many ways to generate cash from an investment property, these are little more than best-laid plans without a property in hand. And in this regard, the obstacles facing new and seasoned investors are equivalent: high prices, low inventory, and vanishingly quick sales of available investment properties in today’s red-hot market.
The average price of a home in February 2022 was $392,000, an approximate $65,000 jump vs. 2020. Likewise, the average duration of a house moving from ‘just-listed!’ to ‘sold!’ was a mere 47 days, down 17 days from February 2021’s 64 days, and down 32 days from the February 2020 level of 79 days (the ‘Rona strikes again). However, with a bit of strategy, low-priced property investment is within reach.
Recommended Read: House Hacking May Be Your Answer to Extra Income
Age Before Beauty
Before setting your sites on the newest listed properties, start instead with homes that have been languishing for weeks and months unsold. Review the ratings that potential buyers have left on these homes. If the comments tilt toward the aesthetic, such as the paint color is too loud, or the carpet is old and dirty, let that be music to your ears as those concerns are easy to fix.
If, on the other hand, the comments are about the home’s location or structure— the house is in a flood zone, or the wiring must be replaced due to dangerous electrical issues— then steer clear because this poses a huge safety issue.
Once you’ve filtered out the deal-breaker properties, hone in on those that have seen a price reduction. Sellers whose listings have gone stale or who are negotiating against themselves by lowering their price will likely shave off more to close the deal quickly.
As tempting as it may be to skip attending the home inspection and wait for the report to be mailed to you, tagging behind the inspector gives you a guided, insider tour of high-ticket items that could cost you down the road.
One of the most common issues flagged during the home inspection is the roof. When the inspector completes the roof inspection, ask him or her how old the roof is and how many layers it has. Roofs only last fifteen to twenty years, so the newer the roof, the better deal you are receiving. Likewise, roofs with multiple layers of asphalt shingles are a red flag of deferred maintenance and possible leaks.
Flat roofs can be particularly prone to leaks and, consequently, cost more to insure than their pitched-roof counterparts, so be especially inquisitive regarding these. If you are sensitive to air quality issues, ask the inspector if the house has evidence of mold or mildew.
None of these are deal-breakers necessarily, but knowing about them ahead of time helps you develop a more accurate rehab budget and negotiate price discounts.
Make Your Home Sweet Home Your First Investment Property
Turning your primary residence into an investment property can increase your wealth significantly. In addition, House hacking can generate income by using the roof over your head, which is a low-cost, low-risk way to begin investing in real estate. This will also allow you to transition your mindset from property resident to property investor. House hacking is renting out a portion of your house for an afternoon, a week, or long-term (one year or longer), in exchange for rental income.
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If you have a spare room or spare couch, short-term rental market sites such as Airbnb and VRBO can be a great way to generate immediate income. Likewise, if your backyard is your own slice of heaven, the chances are that others would share your sentiment and be willing to rent it for an afternoon picnic or wedding on reputable websites like Peerspace.
Line up Financing in Advance of Finding a Property
If you will require a loan to buy a property, begin identifying lenders and working through the eligibility criteria well-ahead of prioritizing your shortlist of homes. Key considerations as you evaluate financing include the tenor or duration of the loan, borrower credit score and income requirements, the amount of equity or down payment that you must contribute, and rental income requirements that the property must meet relative to the loan amount.
Importantly, single-family, multi-families of no more than four units, condos, and townhomes all qualify for owner-occupied residential loans, lowering your interest rate relative to an investment rental property loan.
Recommended Read: Rent vs. Own: Which Housing Option Is Best For You
What are your thoughts regarding investing in a rental property? Please share your thoughts with us in the comment section below.
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