Buying investment property seems like a pretty straightforward venture. Select a property, purchase it, clean it up… and tah-dah! You’re ready to rent it out to prospective clients as either a residential or vacation property. Or maybe you try to flip it. Now, just sit back, collect the rent and watch your profits skyrocket along with the value of your investment.
Well, if it were that easy to invest and make profits in real estate, everyone would be doing it. The fact is, an investment property can be a great way to make profits, if managed properly with forethought and meticulous planning…
But buying investment property is similar to running a small business, and corners should not be cut. Therefore, a personal and financial analysis should be performed prior to signing any offer to purchase that dream investment property.
So, let’s assume you have already performed a personal financial analysis. This means that you have enough revenue for the 20 percent down payment, and you are in a financial position to purchase an investment property. If not, you can perform an initial analysis using an investment property calculator.
There are many financial and personal decisions to be made, but for the purpose of this post, let’s assume you have determined you are ready to purchase an investment property.
Evaluate Your Personal Investment
Many people tend to focus on profitability and market research as the primary considerations for buying investment property (see No. 2). However, an equally important factor that should be considered up front is how much time and energy you are willing to personally invest in managing the property.
- Are you going to want to answer the phone at 3:00 am about an overflowing toilet?
- Do you want to deal with screening prospective renters and running background checks and credit histories?
- Are you prepared to tackle the upkeep and maintenance associated with an investment property… or hire a property manager?
Managing a multi-unit building is different from managing a single family home, which is different from a managing a vacation rental. Someone is going to have to do yard work, paint, repairs, review applications, conduct social media and marketing campaigns, show the property to prospective clients and answer phone calls.
Each of these tasks takes time and money. It’s important to be clear about your own personal time investment, and what that means in terms of hours and dollars. Part of the evaluation is determining exactly what you want out of the investment property. Maybe this is your first venture and you are dipping your toes in the water… Maybe you want to supplement your income or increase your property holdings… Whatever the case may be, doing this evaluation first could go a long way in making your investment property a pleasurable business experience.
Conduct Your Market Research
After determining the type of investment property you wish to purchase and the amount of time you wish to personally invest (possibly hiring a property management company), the next step is to conduct research. Remember, this is an investment, not a personal purchase. If you treat your investment property as a business, there are more chances for success. Understanding the location, rental histories, population demographics and construction projects happening in an area will help guide you with your selection.
What may seem like a fantastic deal could end up being a big loss in years to come. Neighborhoods are in a constant state of flux… Where one is decreasing in value, others are increasing. The more information and data you can obtain prior to buying investment property the better position you will be in to find a great deal. You could personally conduct the research yourself; however, sometimes there is no substitute for hiring an expert consultant to conduct a real estate market analysis report for you.
So now you have completed your research, and you have a budget and a plan about how to manage your investment property. The next step is making the purchase. Buying investment property should not be a rushed affair. There are many different factors that can affect an investment property’s value, including interest rates, property values and the economy in general. Money isn’t the only reason to take your time. Finding the right purchase in the right area should be done methodically and should fit within the goals you set above. You want to purchase the property for as little as possible, while maximizing your return and limiting your risk. Stand firm on what you want.
Set Personal Goals
The internet is flooded with certain “rules” about investment properties. Should your monthly rent be .08% of the selling price… or 1%? Then there’s a 2% rule says that the monthly rent should be equal to or higher than 2% of the purchase price. These rules are not absolute and should only be used as a guide or screening tool. Indeed, many of these rules do not take into account taxes or management fees. Instead, set your own personal goals and perhaps seek input from a professional. Know your pressure points, where you can hedge and where you can give a little… because only you can determine your budget and goals for the short and long term.