Buying an investment property? Here’s what to look for
Not to sound impolite, but when you’re in the market for an investment property, the best advice is to “get over yourself.” That’s another way of saying buying real estate as an investment can be profitable, but it has nothing to do with personal taste. So unlike collectibles and art, you won’t be following the “if you love it, buy it” principle. Instead, follow these basic guidelines to find an investment property that will work for you and your financial goals:
Property to flip for?
The first part of investing in real estate doesn’t involve open houses or even a realtor. You start the process by deciding what you hope to accomplish with the property, enlisting the help of your accountant, financial planner or even estate planner if you need to. You’ll definitely want to determine if you want the long-term income that being a landlord can provide, or whether you’d prefer to renovate and flip for a quick (but risky) profit in a lump sum.
If the flipping seems most appealing, you’ll need to establish a budget that includes 15 to 20 percent of the home’s sale value just for renovations. You’ll also probably want to link up with a realtor who specializes in short-resale properties and is connected. Beyond that, while you’d think you’d be looking for ancient fixer-uppers and foreclosures, avoid both. Old homes may use up all your profit in the renovation, and foreclosures can also be money pits. Instead, with the help of that super-connected realtor, look for up-and-coming areas first, and then the homes there that are inexpensive but mostly need cosmetic improvements. You don’t want to commit to much more than new paint, pulling up carpets, new appliances and a couple of flats of pansies for added curb appeal.
Top profit from rentals
If you decide that purchasing a property for rental fits with your goals, you’ll have different dos and don’ts than people buying homes to flip. If you’re new to the rental property arena, save yourself a lot of time by crossing condos and townhomes off the list. Almost always, a condo HOA restricts the numbers of units that owners can rent to a certain percentage, and you want to be able to seek property freely and get great deals without worrying about that restriction coming into play. Other places have rules requiring you to live in the place yourself first for a year or more in order. That’s no way to begin your rental business! You’re usually better off looking for duplexes or single-family dwellings, to begin with. Once you’ve gotten some experience, not to mention more investment capital, you can look for larger places or those in more expensive neighborhoods that will command higher rents.
A new way to look at location
When you buy a home or condo for yourself, it’s simple to figure out if a neighborhood suits you. If you have school-age children, for example, you’ll want to consider how close and how good local schools are. If you don’t want to maintain a car, you would look for homes near public transportation. To purchase an investment property, though, you have to widen your scope. Everything from crime rate to rent-per-square-foot might be important to potential renters, even if it’s not important to you. Instead of guessing what potential renters might like, tap a realtor in your area’s top rental areas, be they student or working professional hot spots, or perhaps an area near a military base or another major employer. Consult websites like Zillow and Trulia to get an idea of potential rents in the areas you’re considering.
Hidden profit potential?
Since your end goal is profit, make sure to compile (or have a realtor compile) all the purchase expenses and balance them against potential rents. It’s super important to remember that you won’t have 100 percent occupancy for any property you might rent. So you’ll need to incorporate some lost rent due to downtime when you’re figuring how much you can afford to pay for an investment property in a given neighborhood. You’ll also want to discuss the matter with your tax advisor since some tax deductions from renting the property can offset other expenses. Once you crunch all the numbers, you may be surprised how much you can pay for rental property and still turn a profit.
Of course, when you’re first shifting from being a homeowner to someone who invests in real estate, there are also hidden expenses to consider. For example, the experts recommend adding 10 percent to your budget for keeping the property in good repair, and another 10 percent to pay the management company if you plan to use one. Don’t let the expenses scare you, though. If you’ve got the money to invest in rental property, there’s usually plenty of padding between the amount you will earn from rent and tax deductions and the amount you’ll pay in the mortgage, insurance, maintenance, and other expenses. To be on the safe side, be sure to run several rent scenarios using one of the top-rated real estate calculators available online.
Are you cut out for real estate investing?
One last caveat: Purchasing investment property is a good way to make money, but there are a lot of associated risks. Some people simply do not have the personality to make it work. If you would get anxious waiting six months between buying and successfully flipping a property, for example, you might want to take a pass. Same if it’s going to bother you to occasionally lose a few months of rent because your tenant flaked out. If you can forge through the bad times, the risk of owning investment property usually pays off. Should you take the chance? You have to answer that for yourself, and it’s the only time you’ll make a purely personal decision regarding investment real estate.