Before you buy an investment property consider these 5 things.
Whether you’ve done your homework on the real estate industry or watched too many reality TV shows about house-flipping, it might seem liking getting involved in property investment is pretty simple. Like anything, the people who are really good at it make it look easier than it is while everyone else struggles to keep up because they weren’t fully prepared. There are so much more nuances to consider and so many more pitfalls to maneuver than you see on television. So if you are interested in becoming an investor, here are 5 things to consider before you buy an investment property.
Consider the Condition
It might be a dream to take a fixer-upper, fix it up, and find a big payday, but there is a lot of work that goes into completing that process. Matt from Nexus Homebuyers, flips 4 houses a month, and he mentions that “flipping a home is not easy, especially if you’re dealing with an older home. There are quite a few things that could go wrong during the process, but having an experienced contractor and knowing your numbers will go a long way in this business.” When you’re looking at houses or buildings as potential investments, you have to really dig into the true condition, and we might mean that literally. You’re going to want to get your hands dirty to understand just how deep of a hole you’ll need to dig your way out of.
First and foremost, get an inspection from a professional who can provide you with a thorough and detailed report of the building’s condition. From there, figure out everything that needs to be upgraded in order to get it in a safe condition, decide what repairs you can handle, and decide what repairs you’ll need to hire contractors to do. Make sure to get estimates for all of that work and then add it all up to see how much money you’ll need to invest in your investment, as well as how long it will take before it ever turns a potential profit. You’ll have a much more realistic idea of what you’re getting yourself into now.
Pay Your Taxes
Another financial burden you’ll need to consider is property taxes. One of the easiest ways to watch your potential profits go away is not understanding the tax situation you’re getting into.
The first thing to do is to figure out what the property taxes are like in the area of your investment. They vary from city to city, region to region, and state to state. A good rule of thumb is that you’re probably going to pay higher property taxes in an urban area while property taxes are likely to be lower in rural spots. But again, that doesn’t always hold true so make sure you know for sure because higher taxes will bite you quicker than you think.
Another thing to consider is that some municipalities will charge you more as an investor than if you were an occupant. You’ll also want to check to see if there is a homestead exemption on the property, which could have a major effect on property taxes. The local tax assessoror a local tax attorney should be able to provide you with the ins and outs of the local code.
Another way to lose your shirt quicker than expected is to not consider insurance costs with an investment property. You have to do your research and make sure you’re making smart decisions that won’t cut into your reserves but also won’t leave you in the lurch if things go wrong.
First, figure out the kind of insurance coverage you want on your property. This way you’ll be able to see what kind of premiums are involved. You might want to take out a policy with a smaller premium to save money now but that will come back to bite you if there’s a problem and you need to file a claim. Or you could go for a higher premium to cover yourself, which will cost you more up front. You also have to consider policies that protect tenants and whether or not that’s something you want to include. You might be able to pass that cost on to them, but only when they’re actually moved in. Until then, it’s up to you.
When you’re looking at policies, you also have to consider what mitigating factors you’ll need to protect your property from. Is it located in a flood zone or hurricane zone? Is there a propensity for sinkholes in the area? Do you need to consider how rising tides or climate change will affect the property in the years to come? Depending on what issues are possible, you might find insurance premiums you’re unwilling to float.
Know the Neighborhood
Where your property is located is almost as important as the property itself. A fixer-upper in an up and coming area has more potential than one in a downtrodden part of town. You not only want to take a look around at what things look like now but also try to predict what things will look like five or ten years from now. Do your research. Ask neighbors and locals how they like living there. Stop in at the local coffee shop and bar to find out what people think of the neighborhood’s direction.
Some of the key factors to consider, especially if you’re looking to invest in residential property, are the safety of the neighborhood, the crime rate in the region, and the curb appeal on the corner. The property itself might look great but if the rest of the street gives you the creeps, that’s going to be a tough sell to the tenants you’re looking for.
Keep Costs in Mind
Perhaps the most important thing to know before getting involved in investment properties is that there are going to be unexpected costs. It’s not really a question of “if” but a question of “how much” when it comes to extra costs that crop up along the way. The inspection might not catch everything that needs work, and once you start doing repairs on one thing that could affect the integrity of something else you never considered. You’re almost always bound to discover something along the way and you’re going to want to have the funds to take care of it.
One option to consider is setting aside a decent amount of cash in a bank account you don’t touch unless it’s needed. You’ll be able to get to it quickly and if it turns out you don’t need it all that’s some extra money available to you later on. The other option is to open a credit card with a large limit that you keep handy for emergencies. Don’t use it for anything in the interim, just put it in a desk drawer until the time comes.
Are You Ready To Buy An Investment Property?
Buying an investment property is an exciting experience and if you’ve done your homework, can be a very rewarding one. These 5 things to consider before buying an investment property can get you thinking about owning your very own investment property.