Buying an investment property is not the same as buying the home you will live in. As a real estate investor, although you own both properties, each one serves a different purpose from the other. As a result of those differences, the parameters you use when buying your home should be completely different from the ones you use when buying an investment property.

The only reason you buy an asset is to make money. This is why before you put your money into a property, you should first determine that it can be able to make you money. You must have a set of criteria for assessing the viability of that investment. How well your criteria measure the profit-making potential of the property before you buy it underlines your success as an investor.

Every savvy property investor knows this simple fact: the profit on an investment property is made when you buy it and not when you sell it. If you make the wrong decisions at the point of buying your investment property, you will pay for it when you eventually sell the asset.

In view of this, what are the things you need to look for in an investment property before you purchase it?

What you need to know when buying your first investment property

1. Objectively assess the opportunities

   

   The one thing you cannot afford as an investor is to make decisions from your emotions. You must critically assess every option before you make your choices, and this will often mean going against your natural inclinations.

   For instance, even if a property appeals to you on a personal level, you must let it go if does not line up your laid-down criteria. Going by logic versus your emotions will save you a lot of trouble.

2. Location, location, location

   The quality of a rental property takes second place to the feasibility of its location. A good location is one with large numbers of renters who would be willing to rent the kind of property you have.

   These potential tenants could be businesses or individuals. When looking for a property, bear in mind that an average home in a good location is better than a great home in a bad location.

3. Understand investment property mortgage
   

   Lenders’ requirements are different when the loan is for buying your primary home versus when it is for a rental property. Investment properties are viewed as risky, therefore their loan approval criteria are stiffer.

   Among other things, you must have a minimum credit score of 620 and no history of defaults in your credit history. Also, you should have up to six months’ worth of mortgage payments for the rental property and your home saved in the bank.

4. Reduce your level of indebtedness

   How much debt you are carrying is one of the factors lenders look at to approve or disapprove your application. They will check the proportion of your monthly income that goes into paying off debts.

   These could be student loans, auto loans, your mortgage, etc. Most times the lender expects that these loan payments should not use up more than 37% of your monthly income.

5. Secure a down payment

   To buy your first investment property you need to put down at least 20% of the value of the property. The lender will want to see proof that this money is actually available in your account as cash or assets that are easily converted to cash.

   Furthermore, lenders will deny your application if the source of the money does not satisfy their lending criteria. For instance, you are not allowed to borrow money to make the down payment.

6. Check your potential cost and profits beforehand

   

   Hopefully, the property you want to buy is already being used as a rental property. This makes it easier to determine the potential profit from the property. You can ask the current owner to show you the financial records of the home. From this document, you will determine the cost of maintaining the home, the potential profits from the property, and the factors that are likely to interfere with your profits.

7. Start with an affordable home

   When you think of how much money you can potentially earn from a large property, you will be tempted to buy it. But the smaller and cheaper your first investment property is, the more you are able to minimize your risks.

   Starting with a smaller property is important for two reasons. With a low cost home, you can afford to make mistakes and minimize their impact. Secondly, if the investment fails, you will not lose too much money.

8. Check out different loan options

   Before you accept a lenders’ terms, find out the existing alternatives. The type of financing you chose for the property will have severe implications for the profitability of your investment. Shop around and get to know the pros and cons of each loan option. One of the best ways to learn about all the loan options and get the best terms is to hire a mortgage broker.