In a previous post we talked about how to choose an investment property location and now we’re going to go into more detail of what to do after you have found a potential property.
Once you buy a rental property as an investment, you will need to manage your rental to maximize returns, protect your equity, and ensure that the tenants are caring for the property. So before you make an offer you need to assess the property critically, with several levels of concern in mind.
Not only should the property be built and currently up to local building codes, it should also be located in a decent neighborhood free of noise and other nuisances. The ideal property should be well priced relative to the other properties in the area. As long as any repair needs are merely cosmetic, they will have an easy fix. As a buyer, you have an advantage in looking for the worst house on a good block, because the problems can be fixed with little investment of time or money.
The following list are some of the important features to consider when evaluating a property. I advise you to spend some time going through this list and compare it to the current property you have in mind to purchase. If some of the items below don’t agree with the property, you might want to rethink your purchase and move on.
- Likely type of tenant – tenants are attracted to properties that suit them. A rundown property in dire need of maintenance is going to attract a far different type of tenant than a cleaner new property.
- Potential cash flow – are your mortgage payments going to exceed rental income? If so then your investment makes no sense.
- Rental income level – how much rental income will you receive each month that the property is rented?
- Condition versus price – does the price of the property reflect the condition? Will you need to spend additional money to fix it up post-purchase?
- Comparison to other properties – how does the property compare with other properties nearby? Look for cosmetically rundown properties in otherwise upscale neighborhoods; that is where real values can be found.
- Crime levels and trends – is the level of crime increasing and are people becoming concerned about their safety of their families? Make sure you contact the city and find out if crime rates are rising or falling in that neighborhood.
- Conveniences – how close is the property to schools, shopping areas, transportation, and grocery stores? If the property is in an isolated rural area, it’s likely market value will be limited which means your potential tenant market is limited as well.
- Price trends – It is a basic requirement for all investors to study recent trends in prices. Either purchasing an economic property analysis report by somebody like Ingo Winzer or consult with the local Association of Realtors which often collects local sales and market statistics.
Although you may be excited (especially if this is your first investment property), this checklist should be mastered and completely understood before you proceed. One of the most common pitfalls for all investors is being aware only of the opportunity, but not of the associated risks of a particular property. In other words just make sure you understand the property and neighborhood before you make a purchase so you’ll be happy with your new investment. Happy property hunting!