Buy Smart: What to Look for in an Investment Property

“Eeny, meeny, miny, moe…I’ll buy this one!” is probably not the best way to go about buying your next rental property. A good investment property can be a super smart purchase if you do it right. Investors make money on their rental properties by receiving cash flow from renters who will both cover the mortgage on the property and also provide them with some extra money each month. Their property can also appreciate in value over time rolling in the big bucks when it comes time to sell. But before your pupils turn into dollar signs, realize that smart investing isn’t the easiest thing in the world. If it were, everyone would make their fortune this way.

In an economy where people impulse buy right and left, how can you make a logical, well informed decision about an investment property rather than an emotionally ridden one? Follow these tips to help you choose your next investment property with confidence and start securing your future today.

Location

You’ve heard it once, you’ve heard it a thousand times—location, location, location. But what does that mean in terms of rental properties? Consider the neighborhood you’re buying in and what kind of tenants it will attract. For instance, is it a college neighborhood where you’ll be renting each room out, or is it a family neighborhood with a lot of single family homes? Single family tenants tend to be more stable and rent for longer than those renting out individual rooms. But if you want to attract these kinds of stable renters look at things like public schools, parks, and other amenities and cultural attractions that a family may be interested in.

Take time walking around the neighborhood of a potential investment property to get a feel for the demographics of the area. This will also help you get a feel for what kind of tenant might be attracted to your property. Watch out for neighborhoods with high crime rates and also do some research to see if there will be any future developments close which could decrease the price of your rental property, or at the very least, provide more competition for renters.

Crunch the Numbers

In addition to the physical location and tenant type, realize that different cities and different property types will have different tax levels. Do your research to see what the yearly taxes are on the property before buying so that you have an idea how much to rent the place out for. Also, single family homes tend to appreciate in price quicker than condos and townhomes—though condos and townhomes may have better amenities to offer potential renters. Deciding what kind of property you want is just as important as deciding where you want to buy.

Make sure to survey the number of listings and vacancies in the area to see how popular the area is to rent. Large numbers of vacancies will signal that the area might not be that great for renters and might warrant you staying on the market for a little longer to get a better place.

Know the Market

All markets have ups and downs, real estate not excluded. Make sure to talk with your REALTOR and loan specialists to buy when the prices are good so that your monthly cash flow will do more than just cover the mortgage of the house. The real trick to investing is to keep your finger on the pulse of the market so you get a good price for the property, and then rent it out to the right kind of tenant.

Though there isn’t any fool proof way to invest, taking some real time to scope out an investment property and talking to those with good experience buying and selling will help you to get the biggest bang for your buck. Real estate continues to be a great way to invest and can be very gratifying as you watch your property appreciate over time.

[…] making such a large investment, you must get your finances in order. This includes paying off any credit card debt and creating a budget for how you plan to pay your […]

Nice newsletter. Good article. Good information. Thank you. Carol

For conventional financing, borrowers with scores at 740 or anywhere above generally receive the same loan pricing (rate and cost). That being said, the better your credit the higher your chances of receiving loan approval with high debt to income (up to 50%) or high loan to value (up to 95%) which can be a major benefit when applying for a new loan. For Jumbo financing, borrowers with credit scores above 800 are generally rewarded with both better pricing and easier guidelines. There are no situations where better credit is a negative when obtaining new financing so we should all continue to strive to reach and then stay in the 800’s.

What are the advantages of a score over 800

Thank you Mike for this information. As a residential realtor the information that you provide is crucial to a successful transaction for my clients. You are indeed a pleasure to recommend to all of my clients. You are so professional, thorough, conscientious and pleasant to work with. !!

Hi Dane! Wanted to make sure I'm clear on this. Am I right in saying that on whichever remodel is done you still take a loss rather than an increase in value - the ROI will never exceed 100% of cost?