How To Avoid Buying a Bad Investment Property
How To Avoid Buying a Bad Investment Property.
Be realistic about your budget.
Real estate investments are very attractive but being a real estate investor requires a lot of upfront money. You'll need quite a lot of financial flexibility and a sound investment strategy figured out before you start investing a significant amount of money.
The passive income from renting out a property will not magically refill your coffers overnight.
Property prices don't reflect the full amount that you will need to invest in if you're planning to rent it out in the future or sell for more money later on. You may need repairs or have to hire people to work in the building should you wish to turn it into a rental property.
In the real estate market, buying rental properties is not something that improves your cash flow in the short term.
Experienced real estate investors know that long-term wealth comes with thinking about not just your next move, but also figuring out whether a particular property investment will be worthwhile in the long run. A good investment may not pay off right away but a bad one is a lesson learned at a great cost to your personal finance.
So how do you decide if an addition to your real estate portfolio is a good investment or a money pit?
Can you preserve or increase the property's value?
Real estate investing tends to be a good idea because a house is something that has concrete, intrinsic value to everyone. Buying property is more than just four walls and a roof, it means having a roof over one's head.
For rental properties:
Before you buy a property to rent out, you first need to find out if you have enough money not just to buy it but also to maintain the house or apartment complex. Rental income will only come after you have attracted the right people.
No one wants a bad tenant, but no one wants a bad landlord either. Rental rates are complicated to determine but in the long run, you need to be able to pay the contractors or workers that will make your property desirable. This includes cleaning staff for common areas, doormen for security and convenience, supers for the tenants and the building's needs. You also need to be able to take care of legal fees and as well as create an easy system for the payment of rent.
Property management is a lot more hands-on in this line of real estate investing, at least if it's the first property you are investing in.
In short, just keeping the cash flow going is going to require quite a bit of work upfront.
Now, if you want to increase the property's value that will mean rent increases and dealing with how to handle current tenant's expectations. Increasing the value of an apartment building is more complex than increasing the price you ask for on Airbnb with its shorter-term rental periods.
For 'flipped' properties:
A type of real estate investment if buying up a property, or multiple properties if you have the funds, and increasing their values to resell. Whether it's a single-family home or a townhouse, the goal is to put down enough money to secure the property and either keep its value steady on the housing market over the years or, better yet, make adjustments that will increase its value.
The home buying process is usually very competitive and the best houses often have to field offers from multiple buyers, driving the price up.
Risky investments in this regard are properties in less desirable areas that would require a lot of money and time to turn into something people are willing to pay for. In that case, other investments or other types of investment might be a better idea for you.
However, the right location means that making the home even more attractive to buyers will pay off exponentially. When you decide to sell and find a buyer that secured a mortgage or better yet can pay cash, your returns could be massive if you managed to preserve or increase the value of the property.
However, there are some things beyond your control. Open houses and negotiating with a buyer that wants to lower their mortgage payments are one thing but you also need to look beyond the property itself.
Check out the neighbourhood, parks, and local schools before buying.
Not all schools, parks, or neighbourhoods are made equal. The value of a home is often influenced by the views, the condition of surrounding buildings, and the services around the home.
Before signing a purchase contract, take a good look at the neighbouring locales. Just because there is a park nearby does not mean that it's great advice to buy the property - some parks are unsafe, not well maintained, or otherwise more of a negative than a positive.
While being close to a school is a good idea in general, some schools are not well rated.
In other words, just because a property is close to something people look forward to in general does not mean that that proximity is always a good thing.
Beyond that, you also want to take a peek in the next few years to get an idea of what a neighbourhood might look like. A good neighbourhood now may be ruined because of a new development that makes home property values drop.
The question of what is a bad investment property is a complicated one because of things beyond your immediate control like having the property close to a newly proposed facility when you had no idea that that could happen.
This is why financial flexibility is important and why people that get into real estate investing do so with business partners to alleviate the burden on a single person.
Your cash flow will improve drastically if at one point you do look at the market and the lessons learned by other real estate investors.
Get a thorough inspection of the house, including pest control and wiring checks.
Though you are not worried about living on the property, a careful inspection is still of paramount importance.
Your investment income will be balanced heavily by the cost you incur at the beginning and that's why you need to make sure that the house itself is in a good enough condition that will not require extensive repairs.
However, if your budget is limited and you're willing to put the time and money toward renovating a fixer-upper into a dashing multi-family home, then an inspection that reveals problems can be used to raise your bargaining power.
While you might be tempted to save money by doing some of the renovations yourself, professional services will give you the best bang for your buck. A real estate transaction is a huge investment but what can turn good investments into bad investments is the mismanagement of a house.
In the eventual sale of an investment property, you want to have done your due diligence because the buyers will be doing a thorough inspection themselves before the purchase.
When it comes to real estate investments for the purpose of renting them out, this is also incredibly important. Tenants won't want to move into houses or apartments with big risks associated with them. Becoming a slumlord is not a good investment strategy.
A good investment is not done on a whim.
If you're trying to figure out how to become a real estate investor, you should look into getting in touch with an equity analyst.
Unless you have the capital to buy a house outright, you will have to deal with mortgage payments that will impair your cash flow for a long time. Being able to predict the future value of a home after renovations and changes in the surrounding area will help you multiply your future income.
Figuring out all of these things takes time but that can save you hundreds of thousands and just as many headaches.
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