When most people think of money saving tips, they think of how to save on food, utilities, and discretionary purchases. But there are ways to save money when buying investment property.
The most important tip is to do your research first and make sure you’re financially ready for the risk that investment properties bring.
You also need to consider all expenses involved, including purchase cost and loan amount, and costs of carrying the property, such as taxes and insurance.
Before you start looking, define why you want to buy investment property.
Is it for an extra income stream? To eventually quit your job and make your living from investment property? To have a more comfortable retirement?
Your reason for buying an investment property will influence your choices along the way. Knowing your reasons helps you stay focused.
If buying investment property is a goal, but not an immediate one, consider letting Mint.com help you stay on track with its goal setting tools.
Then, when it’s time to start scoping out properties, consider these money saving tips that can help.
Start as Owner-Occupant
With this strategy, you buy a property to live in that you will later rent out. If you occupy a house for at least a year, you can make a smaller down payment, particularly with HUD or VA-approved properties.
After you have lived in the house for at least a year, you find another house to purchase and move into, and rent out the original house. Rinse and repeat as desired.
The obvious drawback to this approach is the hassle of frequent moves, particularly if you have young children. Make sure you and your partner are fully on board with owner-occupancy before trying it.
Become a Real Estate Agent
As money saving tips go, getting a real estate license may seem unusual, but showing properties, arranging sales, and making commissions aren’t the only ways real estate agents make money.
Those who want to buy multiple investment properties can save money and get better deals by becoming licensed real estate agents first.
As an agent, you can save thousands in commissions with each transaction. If you only buy one investment property of $100,000 in a year, you can save $2,500 to $3,000 on commissions by acting as your own buyer’s agent.
You’ll also enjoy these advantages:
- Access to MLS listings which can help you find properties, and determine prices on comparable properties, which can help you make the most informed offer
- Valuable contacts with people who can tip you off when great properties become available
- The possibility of more deductions on taxes as an agent than if investment properties are a sideline
The cost of becoming a licensed real estate agent varies by state, but in Nevada (home of Las Vegas, one of the top cities recommended for real estate investment), you can expect to pay $300 to $1000 for coursework, and around $1,600 for the required licensing.
Seek Seller Financing
Occasionally you’ll find a seller willing to finance and allow you to put down less than 20 percent. If your lender offers to loan you 80 percent, you may be able to get the seller to finance the other 20 percent.
Or the seller may be able to finance a smaller percentage, which would still help you put down less than 20 percent as a down payment. However, it’s not easy to find sellers willing to do this. Most sellers just want to sell, not finance a loan.
Look for homes with no loans against them or that say “seller financing” in the listing. Sellers’ terms vary significantly, so don’t expect great interest rates. Sellers generally want a premium when financing.
Ask the Seller to Pay Closing Costs
One of the more common money saving tips when buying real estate is asking the seller to help with closing costs. Seller financing may be rare, but you may be able to get the seller to pay for part of the closing costs as a condition of your offer.
Buyers often ask for a percentage of the closing costs to be paid by sellers. Sometimes sellers who won’t come down on the price will agree to cover some of the closing costs in order to get their asking price. Don’t be afraid to ask. Worst case is they’ll say no and you start negotiations over.
If you’re considering buying investment property, it is critical to think of it as a long term investment. Even in the heyday of property flipping before the real estate meltdown, flipping a property required a lot of hard work, more work than most people realized.
If you can follow some of these money saving tips, break even on the expenses and keep the property in repair, it should gain value over time. You should be prepared for the responsibilities of a landlord (or hire a top property manager to do it for you), and you need to be able to financially withstand a one or two month vacancy if the rental market is slow in your area.
Investment properties can be a terrific investment, or they can be disastrous. Knowing the market, your own risk level, and the level of work required is essential to succeeding as a real estate investor.
Mary Hiers is a personal finance writer who helps people earn more and spend less.