Investment property can serve as an income source and asset builder. Your resources, experience, goals, and tolerance for risk are deciding factors in the type and scale of investment you might make.
Financial commitment is a given. Whatever money you put in to the investment is at risk. Be aware you can lose it all if the investment goes sour. For those who retain active ownership rights and management responsibilities (i.e. you are actively making decisions or working on the property yourself), planning is key. From obtaining a loan to purchase to projecting costs in the areas of insurance, maintenance, utilities, repairs, improvements, and tenant vacancies … a well-constructed and well-visited plan is essential.
The most basic consideration in planning to purchase a property for investment purposes is affordability. In addition to coming up with the down payment on a loan, you must determine what income the property can reliably generate every month to cover your monthly loan payment. If the property requires work before it can be occupied for its intended use, do you have funds in reserve to cover the expense of that work? If you have to borrow money, where can you borrow it and at what interest rate? Keep in mind that expenses for repair and general maintenance can balloon, especially if you are inexperienced and unskilled in performing these tasks yourself.
If you proceed to purchase property, you will immediately need to obtain property insurance. Insurance protects your interest in the property as well as the lender’s interest. There are two coverage options to evaluate in insuring a building:
- Replacement Cost
- Actual Cash Value
You should consider your own level of risk tolerance when deciding between the two. In the event of a loss, Replacement Cost is new for old, whereas Actual Cash Value is a depreciated settlement on the loss. Respects the deductible, realize that the premium will move in the opposite direction of the deductible, i.e. a higher deductible will accompany a lower premium and vice versa. You have to thoroughly consider what you can actually afford to pay upfront in the event of a loss.
If you are serious about purchasing an investment property, call your trusted choice independent insurance agent at The Richey-Barrett Company for your insurance needs.
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