Six Things to Consider When Buying Investment Property
Whether you’re just starting out or sitting on several years’ worth of experience and considerable resources, each real estate purchase represents a major investment. In a nutshell, you as an investor are committing large sums of money with the expectation that you’ll be able to receive an excellent return over time. By the same token, ill-planned or unwise investments carry the potential to do the exact opposite. As an investor you’re exposed to a great deal of risk, so doing your homework prior to committing to the purchase is going to save both your money and your blood pressure. Remember, wise investment isn’t just about finding the right deal by chance or luck but rather a process in which the investor considers all options, decides on long-term and short-term goals, develops a plan and commits to following it, and then acquires the investment as one step in the larger plan. Here are six tips to help your investment perform well.
Acquisition Cost
First up for consideration should be the actual monetary cost to acquire the property. Are you buying this investment property at the right price? Even though the notion of a cheap property worth investing in is mostly a myth, unwary investors can still fall victim to overpriced properties. Always remember to check the asking price of the property against other offers in the area, and if the price of the property is out of step with similar ones in the same location it should throw up a red flag. A fair amount of common sense needs to play a part in your decision as well. If there aren’t any comparable properties against which you can check the price of the one you’re considering, then take a step back and look at any competition you may have as a buyer (or lack thereof) and know what it means: a property that’s been listed for over a year without selling may very well be overpriced, and in the worst of cases a discrete flaw.
Availability of Financing
Financing is a necessity for most investors, and the question you need to be asking yourself is whether or not you can get a reasonable loan on the property. We’ve talked about this before, but in a nutshell the three main things to consider are the down payment, term fees, interest rate, and the availability of lenders. Make sure you can get a good enough interest rate to make the investment worth your while – you may find a decent deal on the property, but if your mortgage rate eats into your profit it can make a huge difference. If you can’t find a lender, by the way, consider this: if they don’t want to make a loan on it, do you really want to own it?
Management Needs
Some real estate, like single family homes in highly desirable communities, is relatively easy to own. Others, like apartments or homes in rougher parts of town, may end up requiring a great deal of management. Are you able to keep up with the management needs of your investment property? If not, do you have a good third-party manager that can help you, and is the property worth the added expense?
Physical Condition
The condition of the property is supremely important, both in terms of where it stands currently and your overall plan for it. A property doesn’t have to be in tip-top shape to have value to you as an investor, but you do need to make sure that you have a plan and know the costs of rehabbing in addition to the projected increase in value once repairs have been made. We say this a lot, but it’s worth repeating: rehabbing is not something to be done on the fly, nor is the cost or projected value increase something to be guesstimated. Always, always, always have a plan. It’s also important to note that physical repairs don’t always add significant value to commercial real estate, so bear that in mind if you’re not working with residential property.
Location
Real estate at its most basic, essential function is and has always been about location, but that doesn’t mean you always need to find the most expensive areas in town when looking for investment property. It’s important to remember that even poorly located property can be profitable at the right price, especially if the area is expected to grow in the future (check out this blog for a more detailed look at how to spot growing communities or locations). If you’re planning to rent, you should look carefully at a property’s location to see if it will cause trouble in retaining existing tenants or in finding in new tenants in the future, and no matter how desirable the location is, be especially wary of changes to the area that may potentially impact competition or limit access to the property.
Exit Strategy
All in all, investment properties usually get sold some day. It’s a bit of an odd way to look at it, but the reality is that most properties do wind up getting sold. The key as an investor is to have as much control over the situation as possible to where the terms are in your favor, and that generally means being aware of the circumstances and the current market environment in which you sell. Timing is everything, but you also need to have an exit strategy: does the property that you are considering have a clear way that you can make money when selling it? Exit strategy is an especially important concern if you’re renting and the area begins to grow less attractive to tenants.
Given the significant cost of a piece of investment real estate, maximizing your profit potential while minimizing your risk is what the game is all about. When formulating a plan for an investment, remember to take these considerations into account. Remember, buying the property itself should be just one step in your overall investment plan. You’re not just making a purchase; you’re making an investment and that requires you to have short and long-term goals as well as a plan for reaching them. Set milestones, stick to your plan, manage your expectations, and turn a profit!
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– Get It Right Solutions, LLC