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What To Look For When Finding An Investment Property

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What To Look For When Finding An Investment Property

Finding an investment property can feel like finding a needle in a haystack if you don’t prepare. Since an investment home isn’t for you to live, it’s not about what you like. Instead, you focus on what renters want.
 
Since you can’t get inside their heads, you have to do research - a lot of it. Roofstock Marketplace is a great place to start. 
 
When done right, investment properties can create a passive income, give you a tax break, and be a nice nest egg for retirement. If done wrong, it can destroy you financially.

9 Things To Look For In An Investment Property

Knowing what to look for when finding an investment property is crucial. Here are the top factors to consider.

1. Quality Location
You could buy the most beautiful house, but if it’s not in an area with the right audience, it won’t matter. For example, investing in a 5-bedroom home in an area that’s mostly townhomes and apartments won’t bring the right audience. Your investment may be beautiful, but it will likely sit vacantly.
 
Look at the location first. Find the right area by doing your research. What do renters want? Is it what you want to invest in? If not, keep looking, but in different areas. Once you know the right area, you’ll find the perfect investment home, but doing it the other way around could lead to financial destruction.
 
It seems backward, but it’s the best way to make sure you have your cake and eat it too. Buying a decent home in the right area will yield greater profits than purchasing a great home in the wrong area.

2. Desirable Home Type
Before you look at areas, you may already know the type of home you want to invest in. If not, now’s the time. Think not only about the financial investment but the time commitment. If you buy a single-family property, you must handle all the maintenance indoors and outdoors or pay someone to do it.
 
If you buy a townhome or condo, the association handles the outdoor maintenance, so you only have to worry about the inside. It’s less work, but also less control. Buying a condo or townhome also requires the approval of the association. Not all associations allow rentals, so it’s more hoops to jump through.
 
Financially, both property types have their pros and cons. Condos and townhomes often have greater cash flow because they’re easier to rent out (less expensive). Single-family homes hold their value better, though. You’re more likely to walk away with larger capital gains buying a single-family home.
 
Think about your overall goals. Are you focused on the passive income now or the overall appreciation years later?

3. Condition You’re Comfortable With
Once you narrow down the area and home type, there’s one more large decision. Do you want a home that’s ready for renters right away, or at least close to it? Would you prefer a fixer-upper, making the home how you want?
 
There's no right or wrong answer. It depends on how much time you have and how much work you want to put into it. You’ll invest more in a home that’s ready for renters but spend more time and possibly more money on renovations on a fixer-upper.
 
There’s another option to throw into the mix, too - turnkey properties or properties outfitted with renters already. You buy the property with a lease and renters in it already. You’ll pay the most for turnkey properties but earn cash flow right away.

4. Appreciation Potential
Look at a home’s sales history. Has it appreciated over the years or stayed the same? Do homes in the area do okay, or do they decline in value?
 
History doesn’t always repeat itself, but you can tell a property’s potential by looking at previous years. Even if you don’t plan to sell the home for 10 or 20 years, knowing how the area holds up as a whole is important.
 
Look at the home’s potential too. If you added a room, renovated the kitchen, or redid the landscaping, would it add to the home’s overall appeal? Would it increase its value? Look at homes in the area - assess their features and see how much the upgraded features improved the home’s value.

5. Positive Cash Flow
Investing in real estate that costs more than you bring in is a bad investment. Even when a home seems like a ‘great deal,’ don’t jump on it until you look at the cash flow possibilities.
 
If the ownership costs are more than the rent, you won’t have passive income - instead, you’ll have a loss. It’s impossible to predict 100 percent how much you’ll make on a property, but you can give it your best guess.
 
You can’t predict every expense, but here are a few to consider:

  • Mortgage payment
  • Taxes
  • Insurance
  • Monthly recurring fees (lawn maintenance, etc.)
  • Maintenance costs
  • Vacancy allowance

Get realistic with your estimates. For example, maintenance and vacancy costs usually cost 10 - 15 percent of the rental income. If you’ve been pre-approved for a mortgage, you’ll know the mortgage costs, and you can check out the average costs in the area for lawn maintenance or other services.
 
Subtract the total expenses from your gross rent, and that’s your cash flow. If it’s not a positive number, it’s not the right property. 
 
Another ‘rule of thumb’ is to bring in no less than 1 percent of the sales price. For example, if you paid $200,000 for a home, you should bring in at least $2,000 each month to make it worth it. Roofstock Marketplace has great listings of rentals in all areas – check there to see the average price of homes in areas you want to invest.

6. Home Aesthetics
To keep the home occupied with renters, invest in the type of home renters want. A Victorian home in a modern neighborhood probably won’t bring in the audience you want—research what renters like in the area and focus there.
 
Know your target audience. Are they young families, retired couples, or singles? Each group has different needs and likes. Finding a property that appeals to your target market ensures you’ll have an occupied home versus one that struggles to keep renters. 
 
Even if it’s not the home you would choose, your goal is to rent to others, and the audience in that area may have different tastes than you.

7. Property Management Options You Prefer
Do you want a hands-on investment or to have a manager handle it for you? Do you want a personal relationship with your tenants, or would you prefer to keep it professional and have a management company handle it for you?
 
Property management services cost money, but so does handling the repairs and maintenance yourself. You have to buy the materials and put in the time. The costs may be similar. 
 
Think about the level of involvement you want, the convenience of doing the work yourself (if you’re local), and the cost of your own time. There’s nothing wrong with hiring a management company to do the job.
 
No matter what you decide, see how it fits into your budget and affects your bottom line.

8. Risks You Can Live With
Every investment has risks including real estate. Each situation is different, but here are a few common ones:

  • The property may sit vacant more than you’d hoped.
  • Unexpected repairs could eat away at your passive income.
  • The home may not appreciate at the rate you anticipated
  • The home may depreciate.
  • You could face legal battles if tenants get out of hand.
  • Dealing with eviction proceedings can be stressful.

Like any investment, there’s risk involved, and the higher the risk, the greater the reward. Don’t let the risks of investment real estate scare you away, but remember them as you make financial decisions. 

9. Lucrative Financing Options
Financing an investment property is more challenging than financing an owner-occupied property. Lenders take a significant risk since you won’t live in the home. If you have financial troubles, the first thing to go may be the investment property mortgage.
 
Lenders know this, which is why they make securing investment property financing more difficult.
 
Most lenders have more stringent qualifying requirements starting with a larger down payment. You’ll need 20 - 30 percent of the sales price to put down. Lenders also require good credit (700+) and stable income.
 
Even with good qualifying factors, you’ll get higher interest rates and pay more fees. Make sure you’re ready financially, but also take the time to find the right mortgage. Just because investment financing options are harder to find doesn’t mean you should overpay. 
 
Keep the 1% rule in your mind and make sure after expenses, you’re still walking away ‘in the black.’ 

Find The Investment Property That’s Right For You

No two investors have the same needs or will like the same type of investment properties. Create a plan to determine what you want out of your investment. Are you saving for retirement, looking for short-term cash flow, or a combination of both?
 
What type of involvement do you want? Is this purely passive, or do you get a kick out of having your hand in the management aspects of it? Do you want to get to know your tenants, and do you enjoy making sure their home is in great shape?
 
How long do you plan to invest? Is this a short-term thing where you hope to make fast capital gains and move on, or is this to set you up for retirement 30 years from now?
 
Take your time and use resources like Roofstock Marketplace to find the perfect investment property that helps you meet your financial goals. 

 

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Posted-In: RoofstockREIT Real Estate