5 Things You Should Do If You Want to Buy an Investment Property
Editor’s Note: Investment property is a cornerstone of most good plans to achieve financial independence. Understanding how to navigate the world of investment property is important if you want to avoid making big mistakes.Thanks to Ben Hartwig for contributing this guest post!!
Buying an investment property is different from buying a residential property. You’re probably interested in investing to secure your financial future in the form of long-term assets. So, you need to do your due diligence.
Just like any other wealth-generating avenue, you need to first equip yourself with the right knowledge. If you are seriously looking to make the dive into owning an investment property, consider these 5 things beforehand.
These types of properties are not lived in by you, the owner. Instead, you purchase this property with the aim of making some form of income, or return on investment. The form of income can be from rent, reselling the house at an increased price, and (more rarely), even royalties.
Some investment properties can also be renovated and re-sold in a shorter time span. This form of short-term return on investment (ROI) is known as ‘flipping’. Lastly, for the sake of definitions, there are 3 types of investment properties.
These are namely:
- Vacant land
- Commercial property, and
- Residential property
Residential properties are undoubtedly the most popular investment. They are also the most stable for novice property investors.
Let’s consider 5 actionable steps you should take before investing in property.
1. Make a list of requirements for your investment property
It can sound logical and generic, but you need a list of criteria before you get a property. You’d be surprised how useful this checklist can be when scouting properties and neighborhoods. The list will differ depending on the length of your investment.
Decide on whether you want to invest long- or short-term. If you want to flip a house, you may be more lenient on how well maintained it is. If you’re in it for the long haul, you’ll want the property in great shape to rent out ASAP. You can also decide whether you’d prefer long or short-term tenancy as there are different benefits to both.
Your list can include local amenities, the quality of the school district, and property size. It’s important to consider numerical and quantifiable aspects of the property. These include property taxes, projected growth/development of the suburb, and crime rates.
After compiling the requirements and limitations, you can then conduct online research. You should find a few options you want to view physically. When you view the property, it’s necessary to check functionality as well as aesthetics.
Check the state of the electrical outlets, plumbing, and overall structural integrity of the house. Alternatively, you could hire a professional to inspect the property for you and draw up a full report. This obviously comes at a price, but it can prevent poor investments, so it might be worth the extra cost.
Another great tip to get information about the neighborhood and its drawbacks is to speak to the locals. If you are comfortable doing so, speak to tenants/renters to be well informed about the major pros and cons of the area.
2. Follow investment property market trends
In order to invest in a property that grows in value, you need to look out for certain data. If you are not a pro in the industry, there are still simple ways of following trends.
You can regularly check the properties in your chosen neighborhood online. You can then gauge the asking price and popularity of property types you’re interested in.
You could also subscribe to newsletters that show monthly/yearly emerging property trends. These newsletters will educate you on mortgage interest rates and the cyclical nature of the investment property market.
Lastly, there are housing market indicators that you need to familiarize yourself with. These will let you know the general state/health of the housing market. Some of the indicators to look out for include foreclosure auction and delinquency rates, as well as rental affordability in an area.
3. Crunch the numbers on your investment property
Making a profitable investment is your ultimate aim. You’ll take a different approach depending on the length of your investment. Valuing your real estate property is the first crucial step for both long and short-term investments. The second is setting realistic expectations.
Return on investment (ROI) is the most important factor to consider. A good ROI is subjective, but a common figure to aim for is 7%. This can be calculated as a yearly ROI.
For instance, if your rental property and all of the additional fees (as well as a small profitable increase) costs $450 000; a yearly ROI of 7% would equate to $31 500.
This would then require you to set the rent at $2, 625. These numbers don’t need to be fixed. The location and size of your property will also limit the amount of rent you can ask for, so you may need to consider a smaller yearly ROI.
The rental income will need to cover fees like property taxes. The taxes can be high in areas that are well cared for. However, it is best for you to know if they are likely to increase drastically over the years.
Remember to also include the cost for monthly property insurance as well as maintenance and repair allowances.
The property will likely appreciate and this will be very profitable when/if you decide to sell it. Keep in mind there are also some tax deductions associated with investment properties. These include interest on the loan, various rental expenses, depreciation of the building, and many more.
4. Select the right agent for you
The sheer number of estate agent/property manager options can leave you feeling overwhelmed. However, there are actually some easy ways of checking their credentials.
When finding either an estate agent or a property manager, the advice remains similar. The best option is to get referrals from people you trust. Asking homeowners in the area you wish to buy in is a great option.
Even with referrals, it’s still important to check your agent’s professional license online and ensure they are qualified in the way you expect.
While experience will speak for itself, it’s imperative to choose a person you get along with as well. Choose a good compromise between chemistry and experience because you’ll be spending a lot of time communicating with this person.
Select an agent that is transparent and will do their best to make your property stand out. Check how they advertise your property or make it look desirable. Select a property manager that keeps the communication channels open and is prompt with repairs and tenant concerns.
Always remember if you are not happy with your initial choice, then you can change your mind. Just be cognizant of this when drawing up or agreeing to the terms of an employment contract.
It’s also crucial to check your agent’s professional license online. You will require the license number of the individual you’d like to vet. Each state will have a website to conduct public license searches. This is to stop any potential fraud from taking place.
5. Consider a Partnership
This massive decision may not be something you want to undertake alone. That is understandable. A real estate investing partnership is when two or more people use their collective financial resources to purchase a property.
Partnerships can be formed as companies. The following are the most common:
- LLC (Limited Liability Company)
- LLP (Limited Liability Partnership)
There are some pros and cons to this form of property investment and ownership.
- The financial burden and responsibilities can be shared between several investors. Sharing knowledge and skills can make the process run more smoothly.
- The costs can be split unevenly, which means you could cover a smaller portion if you have limited funds.
- You can partner up with a more experienced investor for your first property and gain the knowledge without making a huge once-off commitment (and several mistakes).
- If you split the costs, you will need to split the profits as well. The profits will also be split according to how much each individual invested into the property. Always put in place legally binding contracts to prevent future issues/disagreements.
- There are additional costs involved in setting up the partnerships. You will also need to file taxes in a specific way.
- The potential conflict that could arise from this business relationship is something you have to consider. It is more of an inevitability as disagreements will always arise.
As with finding a real estate agent, you really need to find a partner that is credible and worth going into business with. With the former, you can check your agent’s professional license online. However, choosing partners may be more complicated.
You may consider investing with family, friends, or colleagues. Or you may even opt for interested strangers or angel investors. No matter who the partners are, legally binding paperwork is necessary for your protection and theirs.
Experience is gained through action
Buying your first investment property can be a complex and nerve-wracking process. Even though you should be prepared, don’t let fear take over. There are going to be some hiccups along the way, but that will just add to your experience.
Knowing that difficulties will arise can keep you level-headed. Real estate may be the way for you to build wealth long term, or it may not be something you enjoy. Going out there and making it a reality is the only way you’ll find out.
Meet the author
Ben is a Web Operations Executive at InfoTracer who takes a wide view from the whole system. He authors guides on entire security posture, both physical and cyber. Enjoys sharing the best practices and does it the right way!
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Please leave a comment below! What advice do you have for someone considering buying investment property?
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