Investment Properties 101: What to Know Before You Buy

Investment properties can be a great way to generate income, but where do you begin? How much money do you need to purchase an investment property? Here’s a quick outline to get you started on your journey, from Vermont-specific laws to managing your property. 

Key Takeaways:

• An investment property is a piece of real estate you own for profit, whether through rental income, flipping the home, or waiting for values to appreciate.
• It's a necessity to familiarize yourself with Vermont's laws and regulations in regards to fair housing and tenant safety.
• The Vermont Landlord Association is a great resource for landlords.
• Most mortgage lenders require at least a 15% down payment on investment properties.
• A written agreement between landlords and tenants is necessary to protect both parties.

What is an Investment Property?

An investment property is a piece of real estate that earns revenue, whether through rental income, renovating it and selling it for greater value, or waiting for the property to appreciate. The most common investment properties are:

• Multi-family homes
• Single-family homes
• Duplexes and triplexes
• Owner-occupied homes

Find the right investment property for you with Vermont Real Estate Company.

How Much Money Do I Need to Start with?

Investment properties in Vermont range from $40,000 to $2 million, depending on the state of the home, the location, the amount of land, etc. So there’s a lot of opportunity depending on what kind of property you’re looking for. If you don’t have cash on hand to buy the property outright, you’ll need to explore a loan to finance your investment purchase.

Most mortgage lenders require at least 15% of the total cost for the down payment on an investment property. But, the property itself isn’t the only expense. There will also be costs for inspection, closing, and ongoing maintenance and repairs.

It’s possible that your mortgage lender will require you to have up to six months’ worth of mortgage payments in your account to be approved for a loan. You may also need to supply two years of tax returns, W-2s, as well as two months of bank statements to confirm your reliability.

You may be interested in an owner-occupied investment, meaning that you as the owner live on the property. In this case, you can get financing opportunities that are typically for homeowners rather than investors. This is usually a better deal than traditional investment properties. With a primary home, you are typically able to have a lower down payment than when you buy an additional property. Also, banks are less likely to lend money for investment properties because they have a higher risk of people jeopardizing them. It’s not as common for people to jeopardize the place they live. 

Property Costs

What about keeping your property in good shape? As a general rule, landlords can expect to spend about 1% of what the property is worth on ongoing maintenance. It could be more or less, but it’s a good idea to at least set that much aside. Cost of any initial repairs depend on the physical condition of the property.

In Chittenden, Franklin, and Grand Isle Counties, excluding Burlington, you may qualify for landlord home repair loans. These are available for properties that have up to four units, single-family rentals, duplexes, and accessory dwelling units. These are awarded by the Champlain Housing Trust, and some even qualify for project grants of $2,500. 

No matter what type of investment property you are interested in, it’s essential to familiarize yourself with Vermont’s laws, regulations, and resources for becoming a landlord.

Vermont Renter Laws and Codes

Everything is not obvious when you become a landlord. Owning an investment property is not the only thing to take into consideration. You need to familiarize yourself with Vermont’s laws and codes to make sure you are providing proper housing to your tenants. If you are found to be violating your lease agreement with your tenants or breaking Vermont laws, tenants have the right to take necessary legal action.

Vermont’s Fair Housing Laws

Vermont’s fair housing laws protect renters from discrimination from landlords for race, color, national origin, religion, sex, familial status, disabilities, age, marital status, sexual orientation, gender identity, and receipt of public assistance. For example, say you have two couples applying to rent your property. One couple has a baby, while the other couple doesn’t have kids. The couple with the baby has a better application, but you decide to go with the childless couple because you don’t want to have to deal with a baby. This is a type of discrimination protected by Vermont’s fair housing laws. 

If a renter feels a landlord has discriminated against them in any way, they can file a complaint with the Vermont Human Rights Commission (HRC). Once a renter files a complaint, the HRC will talk to them and the landlord. If they find that the landlord was discriminatory, they will try to help the renter and landlord settle the claims. If the tenant does not settle, the HRC will file a lawsuit against the housing provider or the tenant can do so on their own. 

Application Fees

Not from Vermont? Then you might not realize that application fees are illegal. This law was passed in 1999 to make renting more accessible, as the average application fees in other states are 20-30 dollars. 

Keeping Tenants Safe and Healthy

There are also several housing codes that landlords must follow in order to rent out a property. These rules exist in order to protect renters’ health, safety, and well-being. Here are a few highlights you may not be aware of:

• You as the owner of the property must provide and maintain containers for the removal of trash, recyclables, and food scraps. 
• Screens must be provided for all operable windows, and they must be in good repair.
• Vaporizers or humidifiers should not be used by renters or owners in ways that can cause an elevated relative humidity (above 60%).

For more information on necessary Rental Housing Codes, view this resource from the State of Vermont. 

Lead Paint

Before 1978, most homes used paint that contained lead, which is toxic. If your property was built before 1978, you must make sure that your properties do not contain lead paint, endangering your renters. If you discover lead paint on your property, contact a Vermont Lead-Safe RRPM licensed contractor to remove it safely.

Making sure your tenants are safe is necessary to the future of your investment property. But it’s also your tenants’ jobs to keep your property up to the standard you established in the lease. 

Raising Rent

Because of the rising cost of living and higher need for housing, you may want to increase the price of your monthly rent after a given amount of time. To do so in Vermont, you need to give tenants written notice of the increase at least 60 days in advance. In the City of Burlington, you must give at least 90 days of notice.

Landlords’ Rights in Terms of Eviction

In Vermont, renters have 14 days to leave the premises when they receive an eviction notice. This is only true if the landlord completes all of the paperwork correctly. Make yourself aware of your rights, your tenants’ rights, and the laws surrounding eviction in the state. 

Resources for Disputes

The Vermont Landlord Association offers resources and representation for landlords. Their Mediation Program aims to resolve conflict, avoid eviction, and save money for both tenants and landlords. This covers costs for mediation between tenants and landlords, typically a $3,000 expense.

Be sure to read about all of the Vermont laws surrounding landlords and tenants in the state of Vermont. This is a necessity before you start considering how to earn income from your investment property.

Earning Income from your Investment Property

Do your research. What do similar properties in your area charge for rent?

Determine the capitalization rate of your property. To do this, you divide your property’s net operating income by the current market value. The capitalization rate considers the gross amount you can expect to bring in with your property over a one-year period. 

At Vermont Real Estate Company, we can run the numbers for you to help determine competitive rental rates and a fair market value for the property.

Factors to Consider When Assessing Rental Rates

Location is important to consider when assessing your rental rates. Your property will be more desirable if it is walkable to various businesses, amenities, and services. In the United States, walkable communities are becoming more and more popular, with 92 percent of prospective Generation Z home-seekers saying they would pay more money to be able to walk to local parks, shops, and restaurants.

Additionally, one of the highest determining factors for parents and prospective parents is proximity to a good school district. Assess how these factors will impact the investment property you choose and potential rental rates.

How to Manage a Property

It’s important to build a positive relationship between you and your tenants. It’s your job to determine and communicate the amount of rent, when the renter should pay, the length of the tenancy, and who pays for utilities and services. A written agreement is advised, as it protects both parties. 

As a landlord, you have to be available for your tenants. If anything goes wrong or they have questions, you are the person they turn to. When it comes to directly managing the property, you can either hire a company to do it on your behalf or you can do it yourself.

A property management company would be most helpful if you don’t live near your property or you don’t have time to manage it. 

If you decide not to hire a company to do it for you, you will have to manage your tenants and properties. Make sure you are fulfilling reasonable requests from tenants so they are getting what they are paying for.

It’s crucial that you take care of your own finances; you don’t want to lose money on your property. Keep track of all income in terms of rent, utilities, and late fees as well as everything you spend money on for your property to make sure you are making a profit.

If instead, you are looking to turn your property into a short-term rental, read our blog post on transforming your home for temporary guests.

Whether you’re listing your home for monthly rental or setting it up as a short-term rental, there are many things you should know before buying an investment property.

Start your search with Vermont Real Estate Company to find the right investment property for you.