A property that pays for itself and even generates income is a tempting premise. Investment properties are some of the most popular ways to create income and long-term wealth, but they are also challenging to maintain and manage. 

With the rise in demand for vacation homes and a shift from the office to the house, purchasing a rental property to rent out may be a sound investment. If you are willing to do the heavy lifting of researching locations, weighing expenses, and completing proper diligence when buying a property, you may find yourself with a home that essentially pays for itself.

The challenge comes in preparation for the purchase and, eventually, maintaining and managing the property. Below, we outline the six helpful tips for buying an investment property. 

Make a plan and be ready financially

Financial stability is key to making a successful home purchase. The rule equally applies to buying an investment property, with extra emphasis on stability. A good way to think of it is to picture all the expenses and processes that go into purchasing a primary residence and add another layer of difficulty. 

You can start by deciding whether you want to buy a house or a condo. Each will come with different financial requirements and application processes to buy them. Next, you can determine the location, the climate in that area, and decide if you will rent the property year-round or seasonally.

A detailed checklist and outline will give you a sense of what you should start focusing on. Securing a mortgage will be the first hurdle unless you're prepared to make an all-cash purchase. Lenders can have relaxed rules regarding down payments on a first home, but investment properties come with more stringent requirements.

For example, most lenders will ask for a minimum 15% down payment. And since investment properties are generally more risky, mortgage lenders will tend to charge a higher interest rate to the loan than on a primary residence.

Consider all possible expenses

The checklist for operating expenses will be extensive since there is a lot to cover when you start researching what goes into the upkeep of an investment property. The general maintenance costs such as repairs, renovations, and property tax are the most common expenses that come to mind, but there are a few specific costs that rental property owners will have to consider.

The general upkeep of a home you want to rent out is more involved. Depending on how you want your property set up, you will have to keep certain items constantly stocked. In addition, you will most likely have to do many repairs immediately, especially if you have a tenant in the property.

The management of the property itself is another significant expense to consider. Depending on the property and logistics, such as travel and accessibility, you might have to hire a property manager or management company to help you with recurring tasks like weekly garbage or cleaning of common areas. 

Establish who will manage the property

If you want to minimize management costs, managing the property yourself is always an option. But be prepared for a detailed to-do list that updates daily. It is almost essential that you live close to the home if you are needed on site on short notice. You will have to be the one calling a plumber if the sink stops working or a pipe bursts, and it will almost always be time-sensitive. 

If you’re setting up a short-term rental property, you will have to be on top of the amenities you offer, such as shampoo, cleaning supplies, and toiletries, and make sure they are always stocked. You will also have to be ready to respond to your guests whenever they need something. It is a doable undertaking for those who want to make this a full-time job. But others will have to rely on property managers.

Hiring a management company will take care of most of the things on your list. They will be the ones staying in contact with guests, making sure everything is stocked in the house, and coordinating any repairs or maintenance that need to be done. Of course, this comes with a hefty price tag, but it makes managing an investment property a lot easier.

Determine the location

Though it might be enticing to picture a picturesque beach house overlooking the Pacific, determining the location that works best for you is paramount when buying an investment property to maximize cash flow. This will come down to what you want out of the property. 

Do you want to use it for a personal vacation from time to time? Will it be only for renting out? Suppose you’re only investing in the property for economic reasons. In that case, it might be a good idea to scout out an area as close to your primary residence as possible since it will facilitate the upkeep of the home.

Getting an idea of the neighborhood the property will be in is also an excellent way to prepare for the management of the home. Are their emergency repair shops nearby, such as locksmiths or plumbers? Is it easy to shop for items nearby that the house might need if you run out of something? Although it may be challenging to find the perfect balance between an ideal location that also has every convenience, thinking in terms of logistics can help make property management a lot easier.

It is also important to research areas that have shown steady appreciation rates over time. Even if your focus is a short-term rental, there may come a time when you decide to sell the property, so you want to make sure that your equity on the property grows.

Invest in the security of the home

It should be one of your priorities to set up your home with security features. Even if you haven’t bought the property yet, it is good to think about what kind of security it might need before purchasing. 

The location can play a significant role in what you may need. For example, if the home is near a popular beach that hosts events and is often populated, you might want to invest in cameras to check on the house when necessary. Many smart cameras come with features that help you record and monitor everything from your smartphone. 

Google Nest, Wyze, or Arlo Doorbell are some of the cost-efficient and practical tools you can set up by yourself to keep your property safe. 

Hire a buyer’s agent to help with the purchase

Many soon-to-be homeowners choose to go it alone when shopping for a new property. But having a buyer’s agent at your side, especially when investing in real estate, can be invaluable. 

Be sure to interview various agents before committing since you want to hire someone who knows the locale of your choice like the back of their hand. You can leverage their knowledge to get the inside scoop on the neighborhood, whether it will suit the property you want, and whether the property's price will justify your investment. 

The end goal of any rental property is to ensure a return on investment. A buyer’s agent can help you understand the pricing history of the properties in the area, along with the average rent. This can help you calculate whether your rental income will outweigh your expenses. 

When interviewing an agent, ask if they offer a commission rebate. For example, tech-enabled brokerages like Prevu use a commission rebate to unlock significant savings for buyers. It is a straightforward process where the buyer’s agent gives up to two-thirds of the commission they receive back to the buyer upon closing. 

A buyer rebate can sometimes be the difference-maker in choosing a property. The extra cash can help you offset closing costs and help jumpstart the set-up of your new property.