6 Questions to Answer Before Buying Your First Investment Property

The number of millennials investing in real estate is on the rise. In fact, according to a Real Estate Investing Report by Harris Interactive, 55 percent of Millennials said they were interested in real estate investing (and many are less inclined to invest in the stock market). 

Purchasing an investment property is an exciting opportunity, but not one without risks. There are many factors to consider to ensure you're making a profit when all is said and done. 

Answering these six questions can help you gauge whether you're mentally and financially ready to take the plunge into real estate investing. 

1. Do you have debts and should they be paid off first? 

If you're getting into real estate to help pay down debts with the rental income, keep in mind that a new property will come with its own expenses. A new mortgage, insurance, taxes, maintenance, repairs--it'll be a while before the rent checks break even on your property expenses, never mind start chipping away at existing debts. 

2. How much of a downpayment can you afford? 

Traditional mortgage insurance isn’t available for investment properties. That means you need cash. Lots of it. Be prepared to put down at least 20% of the home’s value, but to secure better interest rates, you should really be aiming for 25% or higher.

3. Is your credit score up to par? 

Borrowers with a credit score of 800 or higher are generally offered the best financing. That doesn't take investing off the table if you have a lower score, but it will cost you. 

4. Do you have an emergency fund? 

Even as the owner of a single property, an emergency fund to cover unexpected repairs and broken appliances is a must. The "one percent rule" states you should put away one percent of your home's value every year for maintenance costs. If you have an older home or live in a region prone to natural disasters, it may be closer to 2-3 percent. And with a second property on your hands, you should be aiming to double it. An investment property brings a lot of risks beyond the typical repairs, like tenants unable to make rent. 

5. How quickly do you need to see ROI?

For the reasons mentioned above, you likely won't see a return for 5-10 years or more. So if you're hoping for a quick profit, real estate investing may not be for you. 

6. Can you handle income fluctuations? 

If you're lucky, you could find tenants quickly that stay long-term. Or if you're in a high-demand area, fast overturn may not be an issue. But for most, there will be lulls in tenants, meaning you'll have months with no rent coming in. 

Of course, the mortgage payments and other costs won't be put on pause. Can you keep enough cushion in your account to get you through slow times?

All of the above can be whittled down to one question: do you have the money to confidently purchase your first investment property? 

While there are some inevitable risks, real estate investing is a smart way to diversify your portfolio. Individual real estate investors account for 74.4% of rental properties in the United States, according to the U.S. Census Bureau.

If you do need that extra cushion, whether for your downpayment or to put into repairs, your own property can help bankroll your first investment property without adding another monthly payment. Home equity investments are one of the newest ways real estate investors are accessing their equity quickly, and because there's no interest, they're able to use the funds for their next project.