When it comes to investing in real estate, residential properties also play a crucial role, as you can rent them out, generating a fixed source of income, and realise a substantial capital gain alongside. According to experts, the property you choose must be ideal for prospective buyers, as it helps generate stable income for a long period of time, which becomes vitally important, especially when you are to finance it with a mortgage.

Step into your buyers' shoes while choosing a property and ask the following questions yourself to ease decision-making:

  • Is this an accommodating house?
  • What is the USP of this house that will capture the imagination of prospects?
  • Is it in the vicinity of facilities such as supermarkets, public transport, stations, and the like?

If this is the first time when you have invested in a property to grow wealth, make sure you know the market inside out. The need for deliberation and careful planning cannot be eliminated. Otherwise, your whole project will be doomed to failure. Once you have blocked money in a doomed project, it will go down the drain, and do not forget the loss does not just encompass the value of the property but also the interest which you would be paying down on a mortgage.

Steps you should follow before investing in a residential property

Here is what you should do before investing in a residential property:

Determine your budget

The market value of a property varies by location. Some locations have more expensive houses, which might be out of your league. Before you start hunting for an ideal property, you must evaluate your overall financial condition.

  • First off, you should know the value of an existing property. This will help you know how much additional funding you need to arrange.
  • Evaluate your current budget to assess how much of a deposit you can arrange. Bear in mind you will need to make provisions for extra funding despite trading in your existing property for a new one.
  • If you have an outstanding mortgage, consider the cost of early repayment charges.
  • Make sure that you have an emergency cushion so you do not have to chase lenders to fund them.
  • Do you have outstanding high-cost debt? Payday loans and bad credit loans with no guarantor must be avoided at the time of taking out a mortgage, as they lower your chances of qualifying for lower interest rates.
  • Do you have an alternative plan in case your financial situation is turned upside down?
  • What if your property fails to generate income as per your expectations?

The housing market is risky. You should take into account all factors to ensure that your projects will not go to waste.

Do proper market research

Talk to a real estate agent in your area to gain insight into the market. What kind of houses have high demand? The market scenario decides whether investing in a small house or a flat is a good choice. There is no point in investing in a house when a large number of people are inclined to purchase a flat.

Likewise, you should not throw your money at large houses when small houses are preferred by people. Maybe buying a house on the outskirts is the right decision. Do proper market research so as not to rue the day.

Maintain your credit score

A good credit score is paramount when it comes to qualifying for a mortgage. Your lender would run an affordability check at the time of financing your new property. A credit score perusal is part of this process. A stellar credit rating will allow you to qualify for lower interest rates.

If your credit history is not up to scratch, you should carefully evaluate whether the lender you are applying to accepts your credit score. Otherwise, your application will be turned down, and your credit score will be affected due to hard inquiries. This will make your situation even worse.

Here is how you should ameliorate your credit score:

  • You should pay off your bills on time.
  • A credit utilization ratio should not be more than 30%. Pay off credit card bills in one fell swoop.
  • Focus on a debt-to-income ratio, too. Though this does not affect your credit score, it improves your chances of getting approval for a mortgage. It should not be more than 30%. The lower the better.
  • If your credit score is already abysmal, consider using a credit builder loan.
  • Avoid short-term high-cost debts such as payday loans. Any recent payday loan on your credit report will influence your lender’s decision about approval.
  • If you have too many credit cards, do not close them even if they charge some fees, as otherwise this will significantly raise your credit utilisation ratio.

It is vital to instil a sense of responsibility in you. For instance, if you have multiple credit cards, you do not need to use all of them. Just use one or two and never max them out. Create a budget and build an emergency cushion, so you do not have to keep borrowing money every now and then.

Diversify investments

Money you are stashing away as a deposit for your property should not be left idle in your savings account. They yield nominal interest, which is not enough to offset the impact of inflation. You should rather invest this money in diversified assets.

Diversification will preclude you from huge losses when the market crashes. Along with stocks and mutual funds, which are subject to market risks, you should buy a fixed deposit, a favourable and safer investment. You will earn compound interest until it matures. Your savings will quickly grow.

To wrap up

When you are investing in a house to build wealth, you need to carefully plan your budget. Not until you know stability in your finances will you be able to choose the right investment property. Additionally, research the market before dipping your toe into the water, so you do not regret it down the line.