Buying investment properties has important differences to buying a home to live in. There is certainly money to be made, but there are also many things to be aware of to avoid the pitfalls.
roperty investments are some of the least liquid investments one can make, and a lot of time should be taken when making a decision. Those investing in property can buy anything from store fronts and industrial properties to mobile home parks, but single-family houses and apartments are usually the best for beginners, and they generally have shorter vacancy periods.
When approaching investing in property, there should be a plan that includes an eventual exit strategy. Those who are not ready for a real, long-term commitment should consider REITs and other ways of investing in property.
Type of investor
Buying investment properties is not for everyone. Besides the willingness to commit to a long-term plan (beginners need to be very wary of short term, property flipping), there are other things that are either necessary or useful for those with investment properties to have.
- Willingness to research the markets: Investment properties should never be purchased without first doing careful research.
- Expertise in maintenance: The ability to handle at least some repairs for renters will save a lot of money over time. This can also come in handy when fixing up a place.
- Legal expertise: From drawing up contracts to understanding the rights of renters and landlords (particularly eviction processes), anyone getting into investment properties needs to be ready to learn legal language.
- People power: Landlords do not have to live up the cold reputation they have in the minds of many. Someone with good social skills will have an advantage in selecting the best renters and dealing with them in a way that makes everything run much more smoothly.
- Investment money: To secure a loan for a residence that they owner will not be living in, expect the lender to require 25-30% as a down payment.
Finding good investment properties
Great real estate deals do not just happen. Those who want to buy the best investment properties need to do a lot of research and make things happen. Start early and keep a steady eye on local papers, websites and bulletin boards. Talk to real estate agents, those advertising properties (even if not interested in their properties) and other landlords to get a feel of the area and what can be expected. For investments of this size and term, it is certainly worth it to take the time to network.
Public auctions can be a great source. Watch for foreclosure auctions, tax sales, estate sales, etc. Note that auctions held with less notice and in bad weather will often offer the best deals.
Appraising property value
While the lender will require that the property be appraised, it is not a good idea to put too much emphasis on this value. The appraiser is not an inspector. In addition, the appraiser is not going to imagine the potential value of the property after changes either. Although investors sometimes put too much money into properties making changes that renters may not be particularly interested in, this is still important consideration.
Location will be important. How close is the property to both facilities that renters will like as well as how far is it from things they will not. In addition, the property should not be too far away for easy access by the owner either. Check for any plans for future developments in the area that may increase or decrease values.
Looking at past trends in property values for an area will be a good indication of where they will head in the future.
Size and materials will have a big effect on maintenance costs. For example, concrete or wood floors will be less likely to require maintenance or special expenses between tenants.
Before even starting out to buy investment property, go to a bank and see how much financing will be available. Credit scores will be checked so get a copy of your credit report and clear up any discrepancies beforehand.
For both financing and smart investing purposes, have a very good idea of what the total expenses and expected income will be. Factor in about a 10% vacancy rate for rental properties (but of course this may vary with the location and economy). Be ready for the tax assessment to be raised in the future and remember that insurance will be higher for rental properties. The biggest mistake many people make is borrowing, or leveraging, too much. For this reason, total financing (there is no telling when interest rates might rise), tax, maintenance and insurance costs need to be estimated as realistically as possible.
Check with different lending institutions to find the most favorable terms. Make sure the appraiser, required by the lender but paid for by the borrower, is professional and impartial.
Once a property has been found and an initial offer accepted, a deposit, called earnest money, which is sometimes not refundable, will need to be put down. Those not familiar with the entire process of all the closing and other paperwork need to be sure to have a good agent. Check references and choose carefully. An outline of the home buying process can be found here.
Although it can be hard to do, finding the right, long-term, renters from the start will make a huge difference. Any time a renter moves, even without any problems, is likely to cause the property to go unrented for at least a month on top of cleaning and other expenses. The best way to screen renters is through a carefully written application and by thoroughly checking references.
Be sure to craft a professional contract that is clear about which expenses will be covered by the renter and which by the owner.