10 Things to Remember When Looking for Investment Real Property
Condominiums (Photo credit: markyeg)
With the market clearing in many areas of the US and interest rates continuing to fall to record lows, many people are thinking seriously about buying investment property for cash flow and long term capital appreciation.
Here are 10 things to remember when you are looking for investment property:
Positive cash flow - Make sure when you run all the numbers that you can have positive cash flow each and every month; otherwise, you are gambling on appreciation that may not come as quickly as you would like
You won't live there - Just because it's not something you would want to personally live in doesn't mean it's a bad investment property; you need to put your personal preferences aside and look at the numbers
Location, location, location - The ideal property should be close to shopping, public transportation, jobs and recreation facilities in order for it to be a good rental; sometimes you have to pay a little more to get a superior location
Be very careful with condos - If you are buying a condo, make sure you read all of the condo association documents carefully and ask lots of questions - Is the association in good financial shape? Do they have a history of special assessments? Are they involved in litigation? Are they putting enough away for repair/replacement reserves? Do they have enough owner-occupants and a low enough dues delinquency rate to not cause a problem getting a loan? Where does your responsibility to maintain your unit end and the association's begin?
Inspect the property - Unless you happen to be a general contractor or expert in the building industry, don't buy a property without getting a third party inspection
Factor in below-market rent and vacancy into your cash flow - Tenant turnover is a fact of life and getting good long-term tenants is always easier if your rent is slightly below market; make sure you factor these in to your cash flow projections - check Craigslist to see what other landlords are asking in the area
Have a property management strategy - Whether you plan to manage the property yourself or hire a property manager, you should have a strategy well before you buy; if you decide to go with a property manager, make sure you interview two or three different companies early and pick the one that you think will work best for you - fees can be as much as 10% of the monthly rent
Know your market and niche - Pull out a map and draw a boundary around the area that you think will yield the best rental property - focus your search in that area; Are you looking for a 4-plex? Attached condo? Single family detached conventional home? Know what you are looking for and focus on a specific area and type of property. If it's your first investment property, it's easier to find something that's a reasonable driving distance from where you live.
Use a knowledgeable real estate agent - If you don't have a real estate license and need to use an agent, make sure your agent is experienced, understands the area and owns rental property themselves and also understands that business.
Bid carefully - Carefully review the comparable sales; then, unless the seller's asking price is ridiculous, if you are in a market that has limited supply and is getting more competitive, it's best to offer full price and be flexible on terms (i.e., cooperation with 1031 exchange, seller lease-back, closing date, etc.); trying to get a lower price for a few thousand dollars could lose the deal, especially if you are trying to buy a foreclosure or short sale and/or if you are not planning to go all cash
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