Choosing the right investment property can be a daunting task whether you’re a first-time buyer or a seasoned veteran. If you don’t do your research before making your selection you can find yourself in a world of constant maintenance repairs, long-term vacancies, and loss of income month over month.
If you do your research and carefully select the right property type, you’ll be whistling a different tune. Here are five key things to consider when purchasing your investment property.
1. Geographic Location
The most important aspect when selecting an investment property is to consider the geographic location of the home. It is no secret that you can get more house for your dollar if you head towards the suburbs compared to within the city.
However, while these houses may look more appealing aesthetically, tenants or renters may be off put by a 45-minute commute and prioritize nearness to work, shops, and food over a nicer house. It is important to remember that renters are generally not looking for a permanent home, but rather a good location with convenient access to the places they frequent. A nice house in a not-so-nice neighborhood will result in a months-long vacancy while searching for your next tenant.
It is also important to consider that the ability for a home’s value to increase is based on the value of surrounding properties. No matter how nice a property is, its upside is limited if property values in the area are low. On the other hand, a lower-cost property surrounded by high value properties is often a good choice as the potential for appreciation is much higher.
2. Property Value vs. Rental Income
Second to location it’s important to look at the surrounding area and collect information on the rental income other properties are bringing in. While homeowners may be willing to spend and stretch their budget to get their dream home, renters aren’t willing to do the same. The average rental income has steep diminishing returns as you get into more expensive homes.
Let’s look at the example below:
Purchase price: $320,000
Rental income: $1,450/mo
Property tax: $3,900
Insurance: $110/mo
Net monthly income: $1,015
Annual ROI: 3.8%
Purchase price: $113,000
Rental income: $1,100/mo
Property tax: $1,005
Insurance: $39/mo
Net monthly income: $977
Annual ROI: 10.375%
When looking for rental properties, you want to find the best ratio between the value of the property and its annual cash flows. The above is a great example of why the nicer and more expensive house is not always the correct choice. With higher property tax, insurance costs, and diminished rental returns the annual ROI for house A is 63.3% lower than house B.
3. Area Growth Trends
In this rapidly changing world where more people are working remotely and relocating to states with lower cost of living, you should always try to stay ahead of the curve and look for emerging markets rather than chase existing ones.
Did a city recently install a new military base that will bring in 30% more residents to the area? Maybe a factory opened up bringing in 30,000 new jobs. In these times you should remain vigilant and look for opportunities where an influx of new residents will be coming soon as property appreciation and higher rental income is sure to follow.
4. Flexible Tenant Options
One of the worst things that can happen to an investment property is vacancy. Extended vacancies will end up costing you thousands in upkeep, taxes, and utilities while waiting for your next renter. Remaining flexible with your tenant options can help drastically reduce the vacancy period between tenants.
Know your market — if you’re near a college, consider renting by room to college students to always have a filled house with a revolving door of new students. If you live close to an elementary school make the property more appealing to new parents with safety features already in place to help ease the parents mind and make your property much more enticing.
5. Budget for Repairs
Don’t go broke purchasing your investment property. Investment properties often have hidden expenses that you won’t see until you begin the move-in and listing process. Even with home inspections completed before the purchase, things will certainly be missed. For example — a squeaky floorboard, a loose light fixture on the patio out back, or a water heater that breaks down after 3 weeks.
All issues will need to be addressed and without the necessary capital left on hand, you may not be able get the home listed and up to standard for months until you raise additional capital to pay for these repairs.
With that in mind, be sure to have a qualified inspector check out the property before you purchase it. Inspectors will identify potential problems with the home, and this can give you leverage to negotiate a lower price or have the seller complete the repairs before closing the sale.
Conclusion
Purchasing a rental property is quite different than purchasing a family home for yourself. If you don’t shift your mindset from tenant to landlord, you will fall victim to a life of stress, repairs, and money loss. Take your time when making your selection, do your research, and most importantly remember real estate investment is not a get-rich-quick scheme, but a long-term investment.
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