Investment Property | Let's Talk Money Goals

Hey, I'm Matt from the Boston area, and my financial goal for this year is to figure out if an investment property is the right decision for me. I like the way you're thinking, Matt. Do you wanna buy an investment property to get some extra income? You can do that by renting out that property, and you've already pinpointed the area that you wanna invest in, and also started saving that down payment, which is great. So tell me more about why you decided to step into investment properties. The general goal is to find a place that, you know, when I'm ready to sell it, whether it's 10 years or 30 years, will have appreciated and will also help pay for itself. I'm actually thinking that, you know, a property somewhere in a metropolitan area, maybe somewhere that's growing in population, if folks are moving from higher-priced states maybe to lower-priced ones, in terms of taxes, of course, would be a good place to sort of start because I can see the rental market increasing as well as the overall home value increasing. Yeah, you certainly got the right idea. You need to look for an area with strong population growth, strong employment growth, low taxes, low crime, and you also need to factor in the amount of money that you may have coming in from rent. So you need to evaluate the rental market. So you're on a great path right now in trying to decide whether investment properties are right for you. Low interest rates may have you thinking about buying an investment property, but location should still be one of your top criteria. Thinking about the location, obviously, somewhere where folks hopefully want to go and hopefully the rental market will be strong for three, if not four, seasons of the year. And I guess I was sort of thinking about, based on the cost of the property, how I could look at what a potential income stream might look like. I was thinking of checking some home-sharing websites and apps to see what the average market rental rate is for these properties, or for properties similar to the ones I'm looking at. Keep in mind, you'll need to save up even more for an investment property than you would for a primary home. As a lender, look at it like this. If times were to get tough and you were not to pay money on something, your bills and things like that, what would it be? Would it be your primary home where you rest your head at night, every night? Or would it be the investment property mortgage, the extra property that you purchased to generate some extra income? The pre-work on my end is saving up enough to even be able to make this decision, yes or no, as well as doing a lot of research into what markets are hot, where I could see myself potentially vacationing, or on the flip side, just where a lot of other people could see themselves vacationing. If you're planning to use your investment property as a vacation home, take some time to understand the tax implications and lender requirements. As you already are pointing out, you know investment property can be a vacation home, right? So it's important to understand that the tax implications and also the lender implications of each one and how they each define it. You know, investment property, you have to rent it out for 14 days or more in order to be considered investment property by the IRS. And of course, when you have a vacation home, you know, it's your vacation home. You know, you have to live in it for part of the year, but also it has to be at least 50 miles away from you in order for the lender to consider it a vacation home. So some things to consider that when you're going out and trying to get that mortgage that you need to keep in mind. Thank you, Linda. Those are really good points and I think there are a lot of nuances when looking at, I guess, you know, what I would consider vacation or investment properties and what the government or tax officials would consider. And I'm thinking, you know, vacation destinations are typically ones that will be rented by a number of folks, a lot of different stays throughout, hopefully throughout the course of a season versus an investment property can be something that I could see myself living in, you know, down the line. So it's kind of interesting to think about both of those options. Yeah, it's definitely a great way to earn some extra income, as long as you understand the pros and cons, like we spoke about some of them. You know, you mentioned being a landlord, that could be a pro or a con. If you're a great person, a people person, you're able to handle things like that, maybe, you know, that's good for you. Me, I couldn't do it. You know, my limited experience as a landlord, I've actually had a tenant since I purchased the condo that I'm speaking to you from. And I've had two tenants, long-term ones, which have been great. But on the flip side, when I was a renter, I had some very terrible roommates. And so I know that it's sort of luck of the draw and you really have to vet out the folks who you are either, you know, sharing a space with or letting live in your space while you're not there. Flipping a home seems like an easy way to make a profit, but taking on another mortgage in this economy could be very risky. If you think about the fact that you're taking on another mortgage, you already have a condo, and now you'll have another mortgage that is tied to this income you expect to bring in. And, you know, as we've seen lately with the economy, things could happen, you know? The rental market could collapse, or, you know, schools aren't open as much as they are, colleges and universities that kind of bring in a lot of renters. So you need to evaluate the whole picture. And also, you know, the amount of income you may bring in from this rental, you know, what will you charge? You know, there's a number of things to look at when you look at an investment property, the ones that you're flipping and ones that you're renting as well. At the bottom line, if I have two mortgages and no renters, I still need to be able to make those payments and not fall behind or become delinquent. So I think that the sort of budgeting aspect of considering if you can afford things, would you have no additional income stream and sort of keeping all the additional income as extra savings that, you know, hopefully that's the point of an investment property is sort of my line of thinking to make sure that it is affordable even in rough times. It's been great speaking with you, Matt. Good luck in your search. Thank you, Linda. I really enjoyed chatting with you as well. And this conversation has given me a lot to think about. If you're planning to buy a property in 2021, you need to evaluate its profit potential. And you would do that by looking at the 2% rule, which states that your monthly rent should be equal to at least 2% of the purchase price of the property. Also look at maintenance. Expect to spend 1% of the purchase price of the property every year on maintenance. And also when looking at a home, you need to look at appreciation, job growth and affordability.