Real estate investing has exploded in recent years. It seems that everyone wants to be a house flipper or take advantage of the robust rental property market. The reality is that anyone can buy an investment property, but not everyone will be successful. It takes the right property in the right market with the right improvements to realize a decent return. By just blindly making offers or jumping for the next, best deal without any due diligence you will be greatly disappointed in your efforts. Here are four key items to help guide your next investment property purchase.
You don’t need to be a real estate tycoon to have heard about the importance of location. As much as location is critical there are still investors out there who fail to get the point. Instead of focusing on a specific market or area within the market they are more fixated on price, room count and layout. You can compensate for a lot of property deficiencies with a strong market. Not only does the right location increase demand but it gives you more options with the property. Whether you want to rent or rehab, the right market allows you to do whatever you want and maximize your return.
Everything you do in real estate should revolve the numbers. As obvious as it may be, it needs to be pointed out that your goal is not to simply turn the property over. You are looking to see a return on your investment. If the numbers don’t work you should walk away, as much as you may personally love the property. When running numbers, it is crucial that you are as realistic and have the most updated data you can find. It is easy to bend the numbers to make them look more appealing but by doing this all you are doing is hurting yourself down the road. Never let your personal feelings or any outside voice influence how you view the numbers.
Regardless of what you intend on doing with the property you need to factor in demand. You are going to have to find someone to either rent or buy the property. All improvements you make should have the demand of the market in mind. You may personally think a hot-tub on the deck is cool, but if it doesn’t fit with the market it will do more harm than good. The same is the case with the flooring, countertops, tile and just about everything else you choose with the property. Prior to doing anything you should consider what impact it will have on demand and make your decision accordingly.
Hidden Fees. There are always a handful of hidden fees that can influence the bottom line on every deal. If you plan on rehabbing, you need to know all the costs from the time of acquisition to the time of the sale. These costs, known as carrying costs, consist of the loan repayment, taxes, insurance, utilities and permits. Individually they may not break the bank but if the property goes unsold an extra month or two it will have a real impact. If you plan on renting the property you should consider the cost of management. A dedicated property manager may cure many of your problems but will do so at 10% of the monthly rent received. Depending on how you look at it this can either wipe away your cash flow or free up time to focus on other areas of your business.
Just one rental property can have a positive impact on your bottom line. Before you make any offer, you should review these four important areas, so you know exactly what you are getting into.