3 Factors to Consider Before Investing
Investing in real estate can certainly be a lucrative investment, but only when done right! The flip side of that is that it can also turn out to be not only a financial nightmare but a huge burden emotionally when done wrong.
Before you even start thinking about investing, you need to do your homework. I don’t mean just looking at returns like most “investors” do. There is so much more than the $/sf, the cap rate today or even the purchase price and interest rate you’ll pay on the loan!
There are 3 main categories you must consider when analyzing real estate investments. Those are the:
- Financial Side
Let’s talk about some things you may have not considered immediately before purchasing your first investment.
- ZONING – Never purchase any investment property until you determine the zoning of your potential property and your neighbor’s property. Your property’s value is directly affected by the surrounding properties. When you check the zoning, be sure to check the surrounding properties as well.
- AREA APPRECIATION – Check to make sure that the area where you are considering purchasing has had a steady and consistent appreciation growth of at least 7% per year for the last 5 years on average. You do not want to buy in an area that has already peaked.
- POPULATION GROWTH – Is the area where you are considering purchasing an area where people are moving in? The easiest way to track this is to check population growth numbers. Where there is growth – there is opportunity.
- DO BABY BOOMERS WANT TO LIVE HERE? The country has an incredible number of baby boomers; therefore invest in an area where baby boomers want to live. Baby boomers want a lot of recreational possibilities as well as easy access to good health care facilities.
- OWNER OCCUPIED – Is the neighborhood where you are thinking of buying primarily owner occupied or tenant occupied? Homeowners, that live in their homes, invest more money to fix them up than do renters. Remember, your property’s value is also determined by its neighbors.
- NEIGHBORHOOD APPRECIATION – Before you buy in any neighborhood make sure you research the sales in that neighborhood for the past 5 years. Check to see how that neighborhood has appreciated.
- EMPLOYMENT STABILITY – Without question, one of the biggest factors that affect a local real estate market is the job market. You could be in the nicest recreational area in the world, but if there are no jobs, people leave because they have to find work. Check to make sure that employment in that area has been stable over time.
- PROPERTY MANAGERS – Make sure that there is a property management company that can manage the property in the area where you are choosing to purchase. Many investors have gone on real estate shopping sprees only to find that there is not a property management company available in that area. This poses a huge problem for the out of area investor.
- FLOORPLAN – Floorplan is more important that square footage. Of course it would be wonderful to find an investment that is both large in square footage and perfect in floorplan. However, this does not happen often. If you find a house that lacks a little in square footage but shines in floorplan, buy it. Renters look for properties by price and by bedrooms. They don’t search for square footage. Having the right numbers of bedrooms is more important than having the biggest bedrooms.
- YARD – Often times people come with children and with pets and both of these need room to roam. Many investors that I have consulted have shared their horror stories about not being able to rent out the big beautiful house with no yard. Big beautiful houses are filled with children and pets. Even a small yard will help keep your property occupied year round.
- INSPECTION/AGE OF THE HOUSE Never, ever, ever buy an investment property without having a thorough inspection of the house. Make sure the inspector gives you a good age range for the home and make sure you check the electrical wiring and plumbing thoroughly. Old pipes and wiring can be extremely expensive the replace. Make sure the mechanical side of your investment is not so old that you may be looking at a costly replacement in the near future.
- THE 10% RULE – One of the easiest ways to make money on your investment is to do a cosmetic makeover. A good rule of thumb is “The 10% rule”. This means that if you purchase a house for $150,000, take 10% of that or $15,000 and you should be able to do a nice cosmetic makeover within that budget. If, however, you have to spend a good portion of that money on the mechanical side, not the cosmetic side then you may want to look at another property.
- RENTAL STABILITY – Remember, if you buy a 1 bedroom condo you are definitely limiting the different segments of the rental market that can rent from you. If you purchase a 3 bedroom, 2 bath single family residence you have just expanded your rental possibilities. Just because the condo is $50,000 less does not mean it will be a better investment. In fact, you often have to go a little above your comfort zone to get a highly sought after rental property. The stretch is well worth it!
- COMPARING RENTAL RATES – It is imperative that you know what the rental market is like in your area. Before you buy a rental property, make sure that you know what similar properties are renting for and how long they are taking to rent. Call a property management company and ask if they do opinions of rental value. Many of them do in hopes of getting your business.
- THE FINANCIAL SNAPSHOT – You must do a financial analysis of the property. What will your net operating income be? This is the total amount that you will receive from owning this property (rental payment). Also make sure you know what your total expenses will be. (Mortgage payments, principle, interest, taxes, insurance, utilities, neighborhood association dues, property management fees, maintenance fees, etc.) Your net income less your expenses equals your gross spendable income. This will tell you whether the property gives you a positive or a negative cash flow. Depending on your timeframe and goals, don’t immediately be alarmed if it is a negative cash flow. For your needs may take into account capital appreciation. If the potential is so great that having to financially feed the property for a few years would be OK.
- SELLER FINANCING – Always, always, always ask for seller financing if you can get it. WHY? Because you can often get better terms, better rates and save on loan origination fees.
The best advice I can give a new investor is to put together a team of experts to help you. You should be working with a good inspector, a good mortgage broker, a good contractor and most importantly a good real estate agent who truly understands investment real estate. (Do not just settle for a real estate agent that sells residential homes. If you are going to invest, you need an investment specialist). Don’t be afraid to ask questions and always, always, always do your investment homework.
Investing in real estate is a wonderful tool to achieve financial freedom. Do your homework, invest wisely, take emotions out of your decisions and plan carefully. You will reap the rewards. I hope these points gave you the confidence you need to take that leap into investment properties. Of course, I’d love to walk you through the journey, so don’t hesitate to ask. Let’s open new doors to your future together!
Thanks for reading!
Jen Hudson, GRI
Windermere Real Estate/M2, LLC