Buying an investment property in Kansas can be lucrative. It can be a pathway to earning passive income for many years to come.
But as with any other investment, due diligence is key prior to signing on the dotted lines.
The following are some of the important things that you should consider before buying an investment property in Kansas City.
Tips for Kansas City Real Estate Investors
Tip #1: Pay down your debts.
Still have unpaid medical bills, student loans, or have kids who will soon be going to college? If so, then buying an investment property may not be advisable for you.
Having some cash cushion is key. The last thing you want is for the investment returns to be lower than the cost of your debt payments. Having a safety margin is key!
Tip #2: Have a substantial downpayment.
Unlike owner-occupied properties, investment properties require a sizeable downpayment. Their approval requirements are also a tad stringent.
Generally speaking, for a residential home, you only need to put a downpayment of about 3%. However, when it comes to an investment property, you may need to put a downpayment of not less than 20 percent. That’s partly because mortgages on investment properties aren’t insured.
If you haven’t saved up for the downpayment, you can always apply for a personal loan from your preferred bank.
Tip #3: Buy in the right location.
In which Kansas city neighborhood are you planning to buy your investment property? Obviously, you want to buy in an area that is picking up steam as opposed to an area that’s declining.
An area where the population is increasing can be great for a rental investment. At the very least, it means that you won’t have to struggle to fill your rental property with tenants.
So, what makes for a good location? The following are some of the things to be on the lookout for:
- Plenty of amenities. Things like movie theatres, restaurants, malls, and parks are great for local rental markets.
- A decent school district, especially if you’re targeting families for your rental.
- Low property taxes.
- A growing job market.
- Access to a public transportation system.
- Low crime rates.
Tip #4: Think about how you’re going to finance the purchase.
You’ll have two options in this regard. That is, whether to purchase your property through cash or to finance it. Of course, the option you choose should be dependent upon your investment goals.
If you choose to do it with cash, then you’ll be able to generate a positive cash flow. Say, for instance, you buy an investment property for $100,000. After deducting all expenses such as taxes and income tax, you could be left with as much as $9,500 in annual income from rent.
With financing, you may be able to earn even greater returns. If you put down 20 percent on a home, with compounding at 4 percent on the mortgage, after deducting expenses and interest, your earnings could be as much as $5,580 annually.
While cash flow may be lower, your returns, at 27.9 percent, will be substantially higher as compared to just 9.5 percent you could’ve earned by buying cash.
Tip #5: Calculate your expected returns.
As an individual, your goal should for returns on your investment property should be at least 10 percent.
Expenses to factor in include property taxes, homeowners’ association fees, maintenance costs, homeowner’s insurance, and monthly expenses such as landscaping and pest control.
Tip #6: Invest in the proper insurance.
Protecting your investment property is a no-brainer. Besides a homeowner’s insurance policy, you should also consider purchasing landlord insurance. This will protect your investment home better than a homeowner’s policy would.
Generally, landlord insurance covers basic things like lost rental income, property damage, and offers liability protection.
In Missouri, the cost of landlord insurance can be anywhere between $500 and a few thousand dollars per year depending on the size of the property.
Tip #7: Avoid buying fixer-uppers at all costs.
Fixer-uppers can be tempting to buy because they usually cost significantly lower than turnkey properties. But if this is your first investment property, buying a fixer-upper may not be ideal.
The only exception is if you have prior experience with big improvement projects. Or, if you have a really good contractor that is skilled at doing home improvements.
As a first investment, what you want to look for is a home that only needs minor repairs before it becomes rent-ready.
Tip #8: Understand the responsibilities you have under law.
As a landlord, you’ll need to be well-versed in the Missouri landlord-tenant laws. For example, you’ll need to know what rights and responsibilities your tenants have in regards to fair housing, security deposits, lease requirements, and more.
Remember, you can never use ignorance of the law as a legal defense. Of course, you can always hire an experienced property management company to help you manage your property on your behalf.
Tip #9: Understand the risks.
While real estate is behind the success of many investors, it doesn’t always work for everyone. The following are some of the things that may lead to losses:
- Renting to problem tenants
- Increased property taxes
- High vacancy rates
- Selling an investment property isn’t always easy
- High competition in some areas
When considering Kansas City MO real estate investing, you’ll need to keep your expectations realistic. Don’t expect to start banking hard immediately. You’ll also want to make sure you buy the right property in the right location.
If this is your first rental property, please consider hiring a professional property management company to manage your property for you and increase your chances of success.