22 Apr Is now the right time to buy an investment property?
Q. I’m in my mid-30s and it has always been my dream to invest in an investment property I can rent out on Airbnb or a similar service. I’m hoping to find something affordable that I can fix up, but I don’t know where to start. I think I can cover a 20% down payment. What else can I consider? Are there loans for people who want to include renovations in the cost?
A. Rental properties, especially short-term rentals, can potentially be a lucrative investment opportunity.
As with all real estate investments, the primary consideration is “location, location, location.”
Short-term rentals are in highest demand around tourist attractions and transportation hubs, said Jake Clemens, a certified financial planner with with Beacon Trust in Morristown.
If you’re not going to be living near the property, you may have to hire a management company to maintain it, he said. Before you buy, you should spend sufficient time calculating your operating costs and when you could expect to break even.
“As the environment we are currently experiencing as a result of Covid-19 and the efforts to contain it shows, it is also important to ensure that you are able to cover the costs associated with the property for a prolonged period of time without a renter,” he said.
Clemens said it’s also important to consider what level of your overall investable assets you are committing to the rental and what proportion of your investable assets will be invested in real estate versus liquid stock, bond and alternative investments.
You want to avoid being over-concentrated in any particular asset class, he said.
When it comes to financing, it’s important to note that mortgages for investment properties differ from traditional, primary residence mortgages.
“Banks view investment properties as riskier assets, so if you don’t plan to live in the property yourself, you will likely face a higher interest rate, closing costs and down payment requirements,” Clemens said.
If you are looking at rolling up renovation costs into the cost of the mortgage, consider a Fannie Mae HomeStyle Loan, he said.
“This would allow you to take out one loan to cover both the purchase of the property and the fix-up costs, but there are some requirements specific to this type of loan,” he said. “It would be beneficial to work closely with a mortgage lending professional as part of your search for the right property.”
Lastly, before you pull the trigger, make sure you are well-educated on the laws and regulations regarding short-term rentals in the municipalities you are considering. Some communities are less welcoming than others, Clemens said.
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This story was originally published on April 22, 2020.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.