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What to Consider When Buying an Investment Property

Real estate investment is a practical and exciting way to grow your income and wealth over time.

It’s not always as easy as it seems, however, because investors must put a lot of research and work into each project. It starts by looking for the right property.

With these tips, you can learn the most important aspects to consider in order to get the best return on your investment.

Location

Since real estate is an investment in a permanent place, location is probably the biggest factor in your return on investment. When people look to buy a home, their real estate agents may advise them to select a location that is useful and meaningful to them. Similarly, investors should be considerate of the potential of any location that they choose for real estate investment.

The location should highlight the benefits of the type of real estate. For example, investors who are looking to rent properties to busy professionals might need to look for efficient units in areas with proximity to public transportation and other amenities. Investors who want to buy and upgrade homes for growing families may look for neighborhoods with good schools and family-friendly activities.

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Low Sale Price

Once you have a sense of the location, it’s time to search for good deals on a property. This step of the process might take you more time. You want to find homes in areas that haven’t peaked in value. Within each neighborhood, you’re looking for properties that have a lot of potentials but aren’t priced at the top of the range.

For homes that you plan to hold for years, getting a low price is a great way to lower your operating costs and ensure bigger profits as the property appreciates.

As you look for properties at a low price, it’s also important to consider the cost of upgrades. In many cases, you can get a better price on a property that isn’t in perfect, move-in condition. However, to get it ready for sale or rent to a tenant, you’ll need to have a budget for renovations and upgrades.

As a rule, most experts recommend getting a loan for no more than 70% of the home’s estimated after-repair value. These limits help you focus your search and restrict your choices to properties that present the best value.

Predictable Repair Budget

Before choosing a property, get an inspection so that you have a sense of the repairs you’ll need to make. If you buy a home with plans to renovate it, repairs and upgrades are two sides of the same coin. It’s a wise idea to distinguish them, as upgrades can be optional while repairs are usually a necessity.

You will probably need to make some repairs on any home that is more than a few years old. Make a list of the types of repairs that you feel comfortable handling, and be realistic about any property with repair needs that don’t fall on that list. If you end up having to solve a big problem that you didn’t know about – such as mold or significant water damage – you may end up spending much more than you expected.

Investment Potential

Although any property purchase is an investment in a way, real estate investment requires you to take a harder look at a property’s potential beyond what you would do for a primary residence. The return on investment depends on your ability to choose a home that is ideal for the type of investment you plan to make. Consider the following:

Fix and Flip

If your main goal is to rehab the home and sell it soon after for a big profit, you need a property in an area that is growing fast. Look for places that are up-and-coming, with at least a little momentum for renewal. Neighborhoods anticipating double-digit annual growth in resale values are a good place to start. That way, you’re likely to bring in a profit regardless of the upgrades you make.

Avoid areas where most of the growth potential has happened in the last year or two. You might be able to eke out some value in a neighborhood at the end of a renewal phase, but it’s likely nowhere near as much as you might have made if you had gotten in at the beginning.

Long-Term Rentals

For a long-term rental, your strategy might be different from other types of real estate investment. Specifically, you’re looking for properties that are in good general condition and in a highly desirable area. Do some research into the average rent prices to make sure that you can cover the mortgage and operating expenses with the rent you receive from a regular tenant.

In this case, the sale price may not be as important, because your goal is to get the highest rent possible with the least amount of vacancy. Keep an eye out for neighborhoods that are starting to break down, because you don’t want a property that will lose value or be difficult to fill with a tenant.

Short-Term Rentals

One of the fastest-growing areas of real estate investment is the short-term rental market, such as Airbnb. Some cities and neighborhoods set limits on the purchase of properties for short-term rentals, so you should investigate the local laws and guidelines first.

For short-term rentals, it’s smart to look for properties in areas that are popular destinations for travelers, especially locations that don’t have many short-stay options nearby.

The average stay-per-night rate should be significantly higher than an average month’s rent because you will probably have higher rates of vacancy. Choose a location with predictable access to cleaning and maintenance services, or hire a reliable property management company in the area.

Resale Potential

Although you might buy an investment property expecting to hold it for many years, eventually you will want to sell it. One of the best things about real estate investment is that you can diversify your profits. You earn money by renting a property to a tenant or making upgrades, and then you can make more when you sell.

If you want the best potential for profits on resale, take a look at the growth forecasts for the area within your resale interval. If you’re hoping to sell within a year or two, double-digit annual growth can significantly increase your profits. Long-term investments usually appreciate under any circumstance, but you should look for predictable and steady growth over a long period.

Building an investment portfolio takes extra care, especially when you’re considering real estate. By following this advice, you should have a better understanding of where to look and which choices are the best, depending on your investment goals.

Nicole Hardey

Nicole Hardey is SVP of Marketing at Renovo Financial, a property investment company.

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