Tips for Purchasing an Investment Property



As far as investments in the U.S. go, real estate is one of the best. Aside from the general trend of increasing home prices, the fact that the President is a real estate mogul makes it highly likely that economic conditions will be favorable to property investors.

Regardless, investing in property isn’t something you should take lightly. There are a lot of variables you need to take into account, most of which will be beyond your control. With the right knowledge and preparation, however, you can make the most of your investment property.

investment property under contract

Below are the tips to keep in mind when purchasing an investment property.

Think about the long-term costs and benefits.
Warren Buffett once said: “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” The same can be said of real estate: If you can’t imagine holding on to a piece of property for at least a decade, you’re better off looking at other investments.

Unless you have a considerable amount (read: thousands of dollars) of cash on hand, you’ll want to shop around for low-cost financing options first. Assuming you have a solid credit history, you should have no problem securing low-interest loans. Otherwise, you’ll have to work on either improving your credit score or looking at other ways to finance an investment property.

You should also consider whether you want to live on the property or rent it out to tenants. As a landlord, you can earn a stable monthly income thanks to rent. On the other hand, if you’re not careful when qualifying tenants, you could end up with more trouble on your hands than you’re willing to put up with.

Lastly, don’t forget to account for taxes related to property investing. These taxes include land tax, capital gains tax and stamp duty. If you’re not sure about these, get a tax lawyer or accountant to help you.

Shop around.
When choosing property, you may find yourself overwhelmed with choices. Should you purchase a rental in a high-traffic area like a university, even if your potential tenants (i.e. students) don’t have the biggest budgets? Or should you get one in a high-end neighborhood, even if the costs of maintenance aren’t cheap?

To make things easier, start with the type of property you’re already familiar with. For example, if you already have a few years of experience living in a condo unit, chances are you’re well-aware of what condo dwellers want and don’t want.
Of course, you’re free to invest in a type of property you’re unfamiliar with. But if you want to spend as little time as possible filling in the gaps in your knowledge, it’s a good idea to stick with what you know.

Understand the market.
The last thing you want is to end up overpaying for property. By arming yourself with knowledge about local real estate conditions, you’ll be better equipped to find property at or below market value.

Contact as many real estate agents and locals as you can. Ask them about average rental rates, demographics, property values, suburb reports and other related data. You can also corroborate their information using reliable third-party sources. Don’t forget to check prevailing mortgage rates as well.

Check the age and condition of the property.
If you’re planning to rent out your property, make sure it’s in the best shape possible. It’s easier to justify a higher rental rate when your property looks like a million dollars (even if it isn’t). Have a professional help you in determining whether a property needs repairs, and how much.
On the other hand, a property that’s somewhat rundown can fetch a purchase price well below market value. In that case, consider whether you’re willing to conduct DIY repairs of the place if cost is an issue.

Plan for the care of the property.
Property management isn’t easy. As a landlord, for example, you’re responsible for screening tenants, filing taxes, keeping the books, collecting rent, handling maintenance and repairs, writing contracts, working out insurance plans and more.
If that sounds too great a responsibility to handle, it’s best to get help from a property management company. Generally, property management companies charge anywhere between 8 to 12 percent of the monthly rent.

Spruce up the property.
Whether you’re planning to rent out your property or not, renovating it will work wonders for its market value. For example, you can:
• Make sure your kitchens and bathrooms are modern and well-equipped.
• Stick to neutral paint colors such as cream, grey and beige.
• Use paint to highlight your property’s architectural features, brighten dim hallways and revive tired walls.
• Improve your property’s overall curb appeal.

Buying the right property takes time and effort. It’s definitely not the sort of venture for someone looking to make a quick buck. But if you’re willing to stick with it for the long haul, your profits will keep coming in for the long haul too.

Comments

  1. Nice tips for first time rental property investors. However, I often warn prospective landlords about the problems of renting out a condo. Dealing with a hostile HOAs is not fun. I would avoid it even if you are familiar with how an HOA works.

    Also, if you choose to use a realtor to help you find a property, make sure you work with one experienced in the rental market. Many realtors don’t deal with the investment side of the business and they will not be able to help you understand local rents and vacancy rates. You are better off finding a local real estate investment club and talking to experienced landlords or using a professional service like RentRange.

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