Four Questions to ask Before Buying Investment Property
Buying an investment property can help you build wealth. But you’ll have to fork over some of your own money up-front. Between the down payment, closing costs and new mortgage debt, you could end up depleting your savings to purchase property. It may even take years before you see a financial gain.
So before you jump into a property investment that could make or break your finances, ask yourself these questions to make sure it’s the right choice!
1. Should I buy my own house first?
There’s no rule that says you have to own the home you live in before buying an investment property.
In fact, if you live in a city with a high-cost housing market, like New York, Miami or Honolulu, buying your own residential property might be financially out-of-reach.
On top of saving money for a large down payment in these expensive areas, you’ll have to cover maintenance, property taxes and possibly even high homeownership association (HOA) dues.
So in this case, investing in a cheaper market somewhere else could be the best way to start building wealth. It could even help you start generating income that goes toward the eventual purchase of your own home.
On the other hand, you might want the stability that comes with owning your own home before extending yourself into other investments. If buying in your area is not affordable, one option is to look into first-time homebuyer programs (FTHBs) that help you qualify for less expensive housing or that give you grants for your down payment.
Ultimately, the right choice for where to start depends on your specific circumstances.
2. How much are the property management fees?
Maintenance on a rental home can be expensive. One way to minimize costs is to manage the property yourself, but if you buy out of state, you’ll likely need to hire help.
How much does it cost to hire a property management company? They usually structure fees in one of two ways:
- Fixed fee: You pay a flat fee based on details like square footage and property type.
- Set percentage: Fees usually range from 8% to 12% of rent collected. This structure can incentivize the managers to improve the property and increase rent prices. For vacant properties, you may have to pay one month’s rent up-front.
Additionally, you might have to pay extra fees for one-off circumstances, like if the tenant pays rent late or has to be evicted.
In terms of the actual dollar amount that will come out of your pocket, the cost can vary widely. If you were to collect the average rent for an apartment in the U.S., which is $1,755 in 2025, a property management fee of 8% to 12% would cost you anywhere from $140 to $211 a month.
3. Will rent cover expenses?
Owning a rental property will add a lot of new variables to your financial situation. So when you look at the numbers, you need to be sure of a few things up-front:
- You can still easily afford your rent payment or mortgage payment after the purchase.
- You can afford the mortgage and the maintenance on the investment property, even during times where it doesn’t bring in revenue.
- You understand how your rental income will be taxed and are prepared to report the income and pay the taxes.
While you don’t want to depend on tax breaks, they can potentially make the investment more affordable. For example, you can claim the mortgage interest, property taxes and necessary repairs as tax deductions for your investment property. If the expenses of owning and keeping up the property exceed the rental income, the losses can reduce the taxable income for the year. Losses can also help offset capital gains taxes when you sell.
With this in mind, it’s a good idea to work with a tax professional to help ensure you’re making the best choices based on the real costs you’ll pay, and ensure you’re reducing your tax burden where possible.
4. How long will it be an investment property?
It’s safe to assume most investment properties will grow in value over time. Historically, the five-year growth in home values in the U.S. has been over 25%.
With that said, focusing solely on potential gains can get you in trouble. For example, you might see years like 2024, where home values only grew by 2% to 3%.
So instead of focusing on outcomes that aren’t guaranteed, get clear about your long-term plans for the property. This will help you determine if it’s affordable for you, not just today but for years to come. Be sure to pinpoint whether you plan any of the following uses for the property in the future:
- Your primary residence
- Your vacation home
- Rental home
- Vacation rental
Answers to these questions can help you narrow down the right price range and location for your property, so that it fits in with your future plans.
For further guidance, you can also get help from an NFCC-certified credit counselor to determine how much room there is in your budget for all of these new costs.
