I have been successfully buying investment property for over 12 years and I wanted to provide you with the benefit of my experience.
Buying an investment property correctly is not an easy thing to do as there are a lot of different factors that you need to take into account.
In my early years as a real estate investor, I learned to ask 15 questions when I am buying a house as an investment.
These have worked for me every time, and I encourage you to ask yourself these questions as well because they result in smart property investment.
Before we get to the 15 questions, there are some important fundamentals that you need to be aware of.
You need to approach buying investment property with your eyes wide open so that you have the maximum chance of success.
1. What is an Investment Property?
An investment property can be a piece of real estate, land, part of a property or a combination of these things that you purchase or finance with the aim of generating rental income or to make a profit from the capital appreciation.
If you are buying a house to rent out then rental income and capital appreciation will both apply.
It is all about making a return on the invest you have made in the property. You can purchase an investment property as an individual, as an investment group or through a corporation.
An important decision that you need to make is whether your investment will be long-term or short-term. Buying property to rent out is long-term whereas investing to flip is short-term.
2. Is it a Good Idea to buy an Investment Property?
Any form of investment involves risks. There is no need to fear these risks, but you must be aware of them so that you can make smarter decisions.
A lot of people get involved with buying an investment property because they think it’s safe and guaranteed. But things can go wrong, and people that have made the wrong decisions have ended up losing money with their investments.
If the market is good at the moment, it is easy to get carried away with this and assume that it will stay that way for the foreseeable future.
Many people were caught out with the crash in 2008 and ended up with properties that were worth half of what they paid for them and still haven’t recovered.
The buy to hold strategy is a good one at the moment but how long will it last?
Prices to rent are on the increase and the demand is high at present, but there will come a time when this flattens out because people will not be able to afford higher rents.
For full rental price details by state: Please visit the source at statista.com
It is a common mistake to underestimate how much an acquired property will cost to renovate and what the ongoing running costs will be.
If you are looking at buying property to rent out, then do your homework and estimate the rental income versus the property maintenance costs.
The last thing that you want is for your property to sit empty for months on end because you can’t find a suitable buyer or renter.
You will end up paying each month to maintain the property while receiving no income. Get the word out everywhere that you have a property for sale or rent.
It can be very Tempting at Times to Over Invest in a Property
You may believe that investing all or most of your money in a property is a good idea, but if you can’t turn this around quickly then you could find yourself financially embarrassed.
Remember it takes time to find a buyer or a good renter.
Try not to over stretch yourself. Have a contingency plan to cover the time that it may take to sell or rent your property.
Always consider the “extras” that are associated with buying a property and budget for these. There are always fees and taxes you need to pay.
When added up these can represent 10% of the original property cost so use this figure in your calculations.
You are in the business of making money when buying a house as an investment so be sure to factor all of your costs in when considering the property for value growth.
If you don’t take this into consideration you could end up only breaking even or making a small loss, even if real estate prices are rising.
So, it is a good idea to buy an investment property but you need to factor in all of the costs and not pay above market value.
3. The Fundamentals for Success when Buying Investment Property
When you are buying your first rental property or first house to flip, the sheer volume of information out there can be totally overwhelming.
You can spend days of your life reading about being successful with investment property that the experts have dreamed up and others telling you how you should invest.
This is all very well but it is best to get down to basics when it comes to successfully buying investment property.
You will find a lot of conflicting advice online so focus on the fundamentals and you won’t go far wrong.
Successfully Buying Investment Property is Simple
When you think about it, the concept of success with investment property is simple. All you need to do is find the right property in the right area at the right price.
Other factors certainly help like rising house prices, the demand for buying houses, the demand for rental property and purchasing a property that has renovation potential.
Of course, there is a lot involved in getting to this “success” point. Even if you really know the market in your area well, there is always a ton of research required to find that ideal property.
For example, is the property in an ideal location for transportation, schools, colleges or universities if you are planning to rent to students?
You need to Research and Research Again
The truth is that you cannot do enough research. If you make a mistake at this point your investment property project could be a total disaster.
A lot of people that are new have a tendency to “jump in” and buy the first investment property that they come across and then wonder why they can’t make a decent return.
Do you have what it takes? If you are really committed to succeeding with investment property then you had better make sure that your mindset is right.
You need to set financial goals and know what you want. If you don’t do this then your investment property business is going nowhere from the start.
You have to know the numbers. Crunch the numbers to ensure that you will be getting an adequate return on your investment.
Decide what return on investment you want with all of your investment property projects. Don’t risk your money and spend a lot of time on a project where you will only break even or worse.
After buying a house as an investment there is bound to be work that you need to take care of before you can flip it or rent it out.
If you don’t know any skilled contractors in the area then you will need to find them. Unfortunately, there have been numerous horror stories of how properties have been left half finished due to unscrupulous contractors so be careful.
After renovating, you will have to find buyers or renters for your investment property. This can be very difficult to do on your own if you don’t have the right connections in place.
There are many devious realtors that will attempt to make more money from you than they should. Do your homework here.
There are so many things that can go wrong with investment property. They could mean the difference between success and failure.
The other thing to consider is all of the work that is involved.
The initial research will take a lot of time and then you will need to view several properties before you decide to purchase.
Once you have purchased you need to supervise local contractors to do the work that is required. Do you have the time and stamina for all of this?
To be Successful with Buying Investment Property you need to be Prepared
There have been many examples of budding real estate investors that have failed because they did not make the right preparations.
You do not want to fall into this category. The more prepared that you are the more likely that you will enjoy success.
The time has passed when you could buy just about any property and it would make you money. This was true a few years ago but not anymore.
The property market is unstable and is likely to be for a long time to come so you need to really know the market.
If you invest in the wrong type of properties then you will stand to lose on your investment.
It will take time and dedication to really get to know the market. You will need to be across as many property purchases as you can to see what is selling and for what price.
There will always be opportunities and it is your job to find them before others do.
If you have a specific target area, then find out everything that you can about it.
What are the average house prices? Are they going up or down? What are the average rents? Again, are these going up or down?
There are plenty of ways to find out what the market is doing. You can make connections with local realtors and find lots of information online.
Investment properties can be very rewarding but it is certainly not easy. There will be some tough times ahead and you will need a focused and strong mindset to cope and overcome any problems that you are confronted with.
The Main Difference between Really Successful Real Estate Investors and the others is Their Mindset
You need to set goals and know what you want. Have an open mind when it comes to learning and tackle some of the limiting beliefs that you have that could hold you back.
Adopt the belief that you will definitely succeed and develop an iron resolve that is so strong that nothing will faze you.
Inspiration is very important. If you are not passionate about investment property then you are in for some tough times ahead.
Mix with others that have already been successful with investment property. Strengthen your own beliefs by looking at examples of what they have achieved.
When problems occur always focus on the solution. Too many people focus on the problem which just leads to stress.
By focusing on the solution, you will find an inner resourcefulness that you never thought that you had.
Expect good things to happen and be grateful. If you expect good things then you will get them. Don’t spend your time on negative things.
Show gratitude regularly and you will be rewarded for this with continued success.
Trying to do everything yourself is a sure way to failure. You need a good realtor, mortgage broker, real estate lawyer and a team of trustworthy and reliable contractors as a minimum.
It will take time to find the right people, but once you have them you must treat them like gold as they will be critical to your success.
4. How to buy an Investment Property
Before buying an investment property, there are some very important things that you need to consider. I am going to focus on owning rental property here.
Read this post on property flipping if this interests you more. Here is what you need to consider when buying investment property:
- Your desired return on investment
- The capital required to finance the investment
- The amount of time you can commit to your investment property projects
- Property is not a liquid investment
- The unpredictability factors
Let’s take a look at each of these in turn:
Focus on your Return on Investment
You need to decide what that needs to be and then eliminate investment property projects that do not have the potential to provide you with the return that you require.
It is going to require a significant capital to purchase an investment property. If you qualify for a mortgage then you need to take into account that a down payment of 20% or so is the norm.
You will also need to budget for closing costs, taxes, property maintenance and your investment property being vacant because you have not yet found a renter.
Your Time Commitment
You can save a lot of time if you decide to hire a property manager and we will discuss this later. Managing investment properties can be a time-consuming thing, so you need to evaluate the time that you are willing to commit.
Buying a House to Rent out is not a Liquid Investment
You are in this for the long-term and when you are ready to sell your investment property you need to realize that it can take months to sell at the right price.
I have already discussed that there are many things that can go wrong with investment property. After purchasing an investment property, you may discover things you were not expecting or budgeted for.
A rental property is often vacant for periods of time while you find a good renter and this time period is unpredictable.
Assuming you are fine with the factors above, you now need to decide what kind of investment property you want and where this is located.
I will discuss the location of your investment property in the next section and then whether it is better to buy a condo or a house.
The next step is to start looking for potential investment properties. It is essential that you do this without the emotion involved of purchasing a home for yourself.
Always remember that you are an investor and you need to find a property that will suit the needs of a renter. Whether you fall in love with the bathroom or kitchen is irrelevant.
When you have found a suitable investment property that you believe has the right potential you will need to make an offer on it.
You know what return on investment that you are looking for and you have crunched all of the numbers in terms of fees and taxes.
Negotiate the lowest price that you can. If you cannot agree on a price that meets your criteria then walk away and find another investment property.
5. Is it Best to Buy a Condo or a House?
Are condos a good investment property? Or is it better to buy a house?
This is an argument that has been raging for years so we will take a look at the advantages and disadvantages of both here.
A lot depends on your chosen location and the current market conditions of course.
I always invest in houses or single-family units rather than condos. In my experience, houses have better capital appreciation potential than condos.
The running costs of a single-family unit are often significantly less than those with a condo. People don’t like paying the fees associated with condos.
It is not uncommon for condo fees to rise over time. You will usually have to pay a membership fee each month as well as special assessment fees.
Most renters will not appreciate having to pay higher rent for a condo to cover your condo fees.
You usually have more control with a house. With a condo it is highly likely that you will be subject to the rules of a condo homeowner association which will impose restrictions on how you can use the property.
They may even restrict you from renting your condo out so check what restrictions exist before making a condo investment.
Of course, it is possible that a condo could be a better investment property for you than a single-family property.
You could find condos that are available for sale at less than assessment value. If you have the finances available, it can be advantageous to purchase multiple condos.
6. Location is Very Important
Choosing the right location is essential. You will not make good rental income or flip profits if you purchase an investment property in the wrong area.
Find out if the area that you are considering has all the right signs for making a good investment.
Think about the common elements of an area where property sales are high and the best prices obtained. Do these factors apply to your choice of location?
If not then you will have to rethink your target area.
If good money is being earned and spent in your target area then this is a good sign. It will attract buyers of properties, renters, as well as other property investors.
You may think that you know this already but it is always worth checking
This may seem too obvious but you will be surprised how many newcomers to buying investment property fail to even think about this.
Check to see if there are reputable schools and if there are, then the properties that are located around them will be a good investment.
Commuting into cities while living outside of them is very popular these days. If your target location has good transportation links then there is likely to be a higher demand for property purchases and rentals.
Check out the road infrastructure and whether or not the county or state has any plans to introduce new travel links in the near future.
What kind of employment opportunities exist in your target area? If they are good then the impact on the property market there is likely to be positive.
Are there a number of technology-based companies situated there? These can be very good for the real estate market.
There may be plans for big employers to situate themselves in your location so find this out.
7. Should you Hire a Property Manager?
Should you manage your investment property yourself or use the services of a property manager?
At the most basic level this is all about time and cost. By managing your property yourself, you will save on paying the fees that a property manager will charge.
But it can be a time-consuming process and even get in the way of you planning and executing your next investment property move.
When I first started out buying property to rent out, I did everything myself. I do not regret this as I learned a great deal.
If you are buying your first rental property then I highly recommend that you learn what is required so that you can appreciate what managing a rental property really entails.
But as you grow your portfolio of investment properties you need to give strong consideration to having a property manager take care of property management for you.
Time is your most valuable commodity, and it makes sense to do everything that you can to free up your time to develop your portfolio for greater profits.
When you decide that the buy and hold strategy is right for you it is important that you fully understand what you will need to do to be a successful landlord.
I was determined to learn this first hand, and what started out as a fairly short list of property management tasks soon became a very long one.
Here are some of the things that you will need to do if you decide to self-manage your rental properties:
- You need to secure your properties
- You need to find renters
- You need to attend viewings with potential renters
- You need to decide on whether a renter is right with background checks etc
- You need to have contracts ready
- You have to take the deposit money and manage this properly
- You need to conduct an inventory prior to the renter moving in
- You will need to take care of any necessary maintenance and repairs
- You need to deal with day-to-day renter issues
- You need to collect the rent each month
- You need to deal with late payments or non-payment of rent
Being a landlord can really be a full-time job – and it gets worse the more properties that you have.
There will be times when you receive calls in the middle of the night about some emergency such as a blocked toilet or the heating has failed in the middle of winter.
There are a number of benefits from self-managing your rental properties. As I said before, you will gain a great deal of experience from self-managing a rental property.
Even if you decide to hand over the responsibility of property management, it is always good to understand what they will be doing for their fee.
One of the major benefits of self-management is that you get to choose your own renters. Sometimes a property manager may choose a renter on your behalf that you are not happy with.
There are things that you can do to minimise this happening, but it is possible that they will get this wrong.
The other major benefit is the money that you will save by not having to pay property manager fees. These fees can be as high as 20% of the monthly rent that you collect from your renters.
Another thing is that not all property managers are the same. Some are better than others and if you have special requirements then you must find the right property manager.
You can easily manage your rental properties even if you have a number of them and several renters. The easiest way to do this is to use a spreadsheet such as a Microsoft Excel sheet or a Google Sheet.
There is no need for you to invest in expensive software to manage your rental properties and renters.
However, there is a limit to the number of properties that you can manage on a spreadsheet without missing something important and I would say that the maximum is 10.
After that, if you are serious about managing your own investment properties then you need to look at investing in a property management system. You can link these to your bank and they have many features.
Why Should you Consider a Property Manager?
These days it is not uncommon for rental property portfolio owners to have properties scattered all around. If this is the case for you then you need to find a good property manager in each area where you have a property.
One good property manager is OK if your properties are in the same general area.
The first thing to do if you are considering outsourcing property management is to meet with them to discuss costs and what they will do for the money.
Not all property managers are the same and some will do more than others. You need to feel confident that the property manager has:
- A thorough understanding of the area where your property is (or properties are) located
- A total awareness of rental prices in the area
- A track record in marketing properties for rent and finding good renters
- A process for screening renters where you have a major input
You may think that all of these things are obvious and I guess they are.
But I see a number of people that are new to using property managers make fundamental mistakes that they could have avoided if they had just done their homework.
Find out what the average time is for them to find new renters. You want to minimise the amount of vacant time for your properties as this will cost you money.
Ask these Questions of the Property Managers as well:
- How they will find renters for your properties?
- What is their process for lodging deposits?
- How do they handle contracts?
- How do they handle renter evictions?
- How do they manage late payment of rent?
Once you appoint a property manager then you need to monitor them closely. One thing that you certainly want to watch for is that the property manager finds you the right kind of renters.
You should certainly have discussed this initially.
Here are some of the things that you can expect a property manager to do:
- The marketing to ensure you get renters for your properties
- Viewings to meet with potential renters and show them around
- Ensure that the renter signs a tenancy agreement and understands the rules
- Arrange for the deposit collection and comply with the Renter’s Deposit Scheme
- Complete a full inventory before the renter moves in
- Meet with the renter when they move in
- Inspect your properties on a regular basis
- Deal with any issues that arise on a daily basis
- Follow up with renters to pay their rent
- Deal with evictions if necessary
If you can find a good property manager then they can save you a great deal of time and hassle. It is certainly worth putting in the leg work to find a suitable property manager to manage your rental properties.
Don’t just go for the first property manager that you meet.
Recommendations from other real estate investors are definitely worth following up. If you know others that use a property manager in your area then you should check them out.
However, how you find a good property manager doesn’t really matter – the important thing is that you can trust them and that they will save your precious time so that you can work on your business.
8. How do you Know if an Investment Property is Right for you?
When you are involved with investment property you are likely to come across a number of different opportunities. You need to look at all of the opportunities and decide if any of them are worthy of your investment. How do you do that? Well, you need to follow the advice that we have for you below.
Do they meet the requirements of your financial goals? Everyone is going to have a different view on what financial success is. Some people will want to live in a property in a specific area and own a specific car. Others will want enough money to give them the freedom to do whatever they want.
The most important thing is that you have financial goals. If you don’t then you cannot assess whether an investment property opportunity will take you nearer to your goals or not. Take the time out to define your financial goals (or re-examine them) as they are essential to guide you through your investment property journey.
You need to critically examine each property for the potential revenue that it can generate for you. Calculate a cash flow for each opportunity that interests you. Look at historical data and estimate if you can sustain the income levels or even grow them.
Maybe you are looking at an investment property that needs a lot of renovation work to generate good profits. How much will you need to spend on the property in order to transform it into a good money maker?
I have mentioned the location of an investment property several times because it is so important. You need to do your homework on the local area to be certain that an investment property opportunity will provide the returns that you are looking for. Find out about the economy of the area, employment numbers, current population and growth, the most popular type of properties in the area and so on.
Are there any large companies moving into the area bringing more employment opportunities? Are the numbers of people moving into the area increasing? What kind of property is in demand – houses for families or condos for couples?
Is the price of the investment property right? If you pay too much for a property then it can literally take years for you to make any return on your investment. You must have a very good idea how much a property is worth before you start to make offers.
Find out what the local house price growth is in the area and then find out how much the property sold for last time it was on the market. Do the math and estimate what it should be worth now. Also take a look at how much comparable properties are selling for in the area. If the price is not right then move on.
What is the true potential of the investment property? If the property has been previously rented and you want to continue with it as a rental opportunity then what is the scope for you to improve on any previous rental yields? Will it be easy for you to find suitable renters who will be willing to pay the rent that you want?
If you need to renovate a property then you must know if this is really worth doing. Renovation estimating is not easy and often things are underestimated. Can you add value to the property without spending a lot of money?
9. What ROI can you expect with a Rental Property?
I have seen quite a few people invest in the wrong type of rental property and then end up just about breaking even. Some even made a loss. So, it is vital that you approach all of your investment property deals very carefully so that you can make a good return on them.
Some of you may be thinking at this stage “surely the profit from a rental property is just going to depend on the amount of rent that you charge?” Unfortunately, it is not quite as simple as that.
If you really want to be successful with investment property then I recommend that you build a diverse portfolio of properties. This means that you will have a combination of both short-term and long-term projects in your portfolio.
I always consider the purchase of a rental property to be a long-term investment. In fact, any property that you intend to own for longer than 12 months is long-term. A property that you intend to sell within a year to flip is a short-term investment.
So many investors turn to property for long-term investment because over the years it has proven to provide the best returns. The return that you make on an investment property depends on a number of different factors.
Property tends to be a volatile asset as it has a dependency on interest rates, the economy, the state of the financial market and so on. This is why I always recommend long-term investment. There will always be a demand for private rental homes and property in general. If you can offer competitive rental prices then you should always be able to make a good return if your property is in the right area.
At some stage you may want to sell your rental properties. The best time to do this is when there is a strong economy and interest rates are favourable. Your property should have appreciated in value since you first purchased it.
One of the great things about the capital appreciation of a property is that you don’t have to do anything for it to happen. Just keep hold of your property for a few years and it should go up in value.
You cannot just charge any rent that you can think of however tempting this may be. There are going to be costs associated with your rental property but you have to charge a competitive amount of rent. If your rental prices are too high you will struggle to get renters.
In general, you will be able to charge higher rental prices if your rental property is located in a city or large town. But you will have to accept that the price of purchasing a property in a city or town is going to be higher than in outlying areas.
In cities and towns rental prices can fluctuate on a street-by-street basis. Some streets are a lot more desirable than others. If your property is close to transportation links, schools, shops, parks and so on then you will usually be able to charge a higher rent.
Spending a sum on renovation is almost always a good idea. The more attractive you can make your property the more you can justify a higher price. There will be a number of prospective renters that want to live in your newly renovated property.
If you are going to renovate then this is a cost that you need to account for. You are likely to have other costs as well such as mortgage repayments, property management fees, property taxes, maintenance costs and so on.
You need to keep your rental property in good order so there will be some maintenance costs every year. Sometimes things go wrong with a property and as a landlord you need to attend to these things promptly.
I recommend that you put a certain amount of money away each year to cover things going wrong with your rental property. You can never be sure when these things are going to happen but it is almost certain that they will at some point.
Rental yield is the income percentage against the value of a property. This is very important to you as you cannot assume that a buy to let will be profitable purely on the amount of rent you can charge.
There are two yield calculations used and you need to understand them both:
Gross yield is the most commonly used:
Gross Yield = annual rent amount ÷ property value
Net yield is of more importance to you because it will help you to establish your profit potential. This is the funds that you have remaining after settling all of the costs of your buy to let property:
Net Yield = (annual rent – costs) ÷ property value x 100
I cannot stress how important it is to identify all of your costs. If you forget costs then you will think that you are making more profit than you actually are. As a general rule you want to look for a net rental yield of at least 4%. Any less than this will probably not be worth it for you.
10. Diversify your Investment Property Portfolio
Building an investment property portfolio can be a great way to realize your dreams. Having a number of properties that provide you with an income should provide greater returns than most other forms of investment, so when it comes to diversification you need to think carefully about what you are going to do.
Diversification is all about managing risk. You do not need to diversify your investment property portfolio to increase its performance – this can work sometimes but there are no guarantees. Once you have established your investment goals you will be able to decide on your risk target level.
Base this target on your overall goals, your tolerance to risk and the time horizon that you are operating within. When you diversify you can provide the potential to improve returns you are receiving for your chosen level of risk.
When you have an investment property portfolio a number of opportunities are open to you. Diversifying means spreading your capital across the various opportunities. When you do this, you will often decrease the risks involved. It is never wise to put all of your eggs in the same basket.
As an experienced real estate investor, I can tell you for certain that having a well-diversified portfolio of investments is the way to go. You never know what is around the corner and if you have over invested in one property this can come back to bite you.
There will always be changes in the investment property market. Some of these will be good and some will be bad. It is very important that you spread your money across a wide range of investments to provide the maximum protection should things go wrong.
With investment property there can be many risks. Markets can change at any time and the values of properties in certain areas can fall dramatically. The opposite is also true of course and different areas can experience price increases.
15 Questions to ask before Buying an Investment Property
Here are the 15 questions that I always ask myself before buying investment property:
- What major projects are happening in the area?
- What transport plans are there in the area?
- Who is the main employer in the area? Are they likely to upsize or downsize?
- What kinds of properties match the local demographic?
- Is the property situated near schools or colleges, public transport and major roads?
- What is the rental demand in the area?
- How long has the property been on the market for?
- What type of person or family would live there?
- What is the current market rent for this type of property?
- Is the property currently rented and if so, are they looking to stay?
- Why is the current owner selling and have they had any previous offers?
- If it is a condo or leasehold, how long is the remaining lease?
- What defects or imperfections are there?
- Will a title search reveal something that will affect the purchase?
- Are there and covenants, caveats or any regulatory impositions on the property?
My Final Thoughts on Buying Investment Properties
I recommend that you develop a “fearless” approach to buying investment property. If you have irrational fears about investing in real estate then these are going to seriously hold you back.
You certainly need to calculate risk; I would always recommend that. But not considering most investment property opportunities due to paralyzing fear is not the way to go.
Make a commitment to develop your knowledge of the property market. More knowledge is fundamental to beating irrational fear.
Ask yourself the right questions to determine your best property investment strategy such as:
- What is the limit of your investment?
- What is your ideal investment time frame?
- What investment property strategy do you prefer?
- How much risk are you prepared to take?
You need to be fearless with buying investment property from now on. So, become a lot more knowledgeable and know what you want for the future.