When it comes to buying a home, there are a lot of things to take…
If you’re exploring ways to build regular monthly income and long-term wealth, investing in real estate may be an option worth exploring. The Sacramento housing market is booming, and there is no sign of it cooling as more and more California residents opt to trade in the city life for more affordable and spacious suburban living.
If you’re thinking of joining the investors club and trying your hand as a landlord, the experts at New Way Mortgage have some great advice for you when it comes to buying your first investment property:
What Is an Investment Property?
For those of you who’ve heard the phrase but aren’t exactly sure what it means, an investment property is a home—or collection of homes, such as a duplex or multi-family dwelling—that you own and rent to others to live in. Buying an investment property is to become a landlord, collecting rent to cover your costs (mortgage, taxes, insurance, and repairs)—and, if done right, turning a profit. An investment property can be something as simple as a single-family residence, or a duplex, triplex, or fourplex.
It’s important to note that anything with more than four units requires commercial financing and cannot be purchased using residential mortgage financing.
Purchasing Your First Investment Property in Sacramento
The process of purchasing an investment property in Sacramento is much the same as buying a primary residence, as far as the steps you take in the mortgage process. You need to decide where you want to buy and what size of property you’re looking for, and then qualify for the mortgage needed to buy it.
Something you’ll want to consider is what kind of renters you’re looking for. Do you want a place likely to attract college kids, meaning high but regular turnover, or families who will move in and stay for a long time? Picking a location that’s likely to attract the sort of renter you’re hoping will move in is an important part of selecting an investment property.
Securing Financing for Your Investment Property Purchase
Investment property financing requires slightly more consideration from a lending perspective. Lenders will look at your credit score, debt-to-income ratio, down payment, and ability to repay the loan.
Investment property financing typically requires a higher credit score than a primary residence or first-time homebuyer loan, and a larger down payment. Depending on the property you’re considering, you could be looking at anywhere from a 10% to 25% down payment. There are some exceptions to this rule, including FHA and VA loans on multi-unit properties where one unit is occupied as your primary residence.
As a New Real Estate Investor, Here Are Some Things to Consider When Buying Your First Investment Property
It may sound like purchasing an investment property here in Sacramento (or anywhere else) isn’t much more complex than buying a place to live. While that is to a large degree true, there are things that being a landlord entails that you should keep in mind if you’re thinking of becoming one:
- Unless you have a lot of free time, you’ll need to hire a property manager or management company to oversee your investment property. The cost is usually between 3% and 8% of your rental income, plus additional fees for specialty work.
- There will undoubtedly be unforeseen maintenance and repair costs, so you should start off with some money saved away to cover any such eventualities. Even little issues and repairs can add up over time, particularly if you have multiple tenants.
- Being a landlord and having tenants is a legal relationship, and Sacramento—all of California, really—has a lot of laws that relate to it. Rent-control laws in most cities in the state, for example, are quite strict. Knowledge of these local laws or an expert property manager who knows them is key to staying in compliance.
- You’ll have to report your rent income on your taxes, of course, but you also get to write off all the expenses and costs of owning the property. This can be a huge boon when tax season comes if you’ve put a lot of money into a major renovation or improvements to the property.
Converting Your Current Home into an Investment Property
Not sure if putting your money into buying an investment property is the right fit for you? You may have another option if you’re looking to get in as an investor and are currently a homeowner: converting your current home into an investment property.
If you’re in a place that’s no longer the right size for you or your family, in a location you’re looking to leave, or planning a move for any other reason, you may consider retaining your current home as an investment rather than selling it. Jennifer and Aaron at New Way Mortgage have shared some tips on how to make this happen:
Investing in Real Estate Builds Long-Term Wealth
When you purchase a home, investment or not, you start building equity. That means that over the long run, you’re earning money by owning. Sure, it takes work, it’s not without its risks and costs, and the market has its ups and downs, but real estate over time is an asset.
People will always need a place to live, and people will always want to live in a place as vibrant as Sacramento. If you are thinking of becoming a landlord or looking for strategies to start investing in real estate, our team at New Way Mortgage is here to help and ready to walk you through the process of buying your first investment property in Sacramento.