Do you wonder if now is time for purchasing real estate for an investment? The combination of low home prices and interest rates is making buying investment properties more attractive than ever. With the real-estate market recovering, the timing is excellent to move beyond considering investment properties and take action.
Home flippers are out in full force cashing in on nice profits. Home prices in the Sacramento Metro area are up over 25% in 2013. We wanted to help prepare individuals considering purchasing a home as an investment.
Home values plummeted in 2008 to the tune of 3.9 million dollars according to Zillow. In 2009 alone, another 489 billion in home value was lost across the US. Home prices have rebounded quite nicely, and there are opportunities to profit.
To help you get started, here are 6 considerations to get you pointed in the right direction.
Know your options
Determining exactly what the overall strategy is and choosing a property that coincides with the goals of the strategy is the first course of action. Your major options are:
• Becoming a landlord of an apartment building
• Becoming a landlord of commercial real estate
• Restoration and reselling of a property
• Developing land
A safe approach for first time investors is to start with single family residences because of the increased marketability. Bottom line is there is always a larger demand for single family residences opposed to unit apartments or commercial properties.
Talk to Real Estate Agents
Partner with a few real estate agents that are experienced in purchasing investment properties and can help you locate promising properties that fit into your investment strategy. We also suggest finding agents that consistently have a large number of listings in the area. Not only will these agents be more familiar with market trends and the area you’re looking buy in they can also provide you with opportunities the purchase the properties the same day they hit the market for sale. Early bird gets the worm right!
Look to your local mortgage broker
Establishing a long-term relationship with a Mortgage Broker if you’re needing to obtain mortgages to purchase properties. We suggest mortgage brokers since they will offer more mortgage products than a traditional bank. Mortgage brokers are typically more up to date and knowledgeable about the underwriting guidelines when purchasing an investment property.
It’s in the best interest of the mortgage broker to provide dependable advice because most mortgage brokers rely on referrals to remain profitable long term. The hope is you will be knocking on their door again.
You can also partner with a more experienced real-estate investor and work on closing a deal together. The current economy provides real estate investors the opportunity to work with investors by exchanging the capital you provide for their investment knowledge and firsthand experience.
If collaboration with real estate investors is neither possible nor desired, use the opportunity to discuss pitfalls they have encountered. One way of gaining some personal knowledge of landlord-tenant relations is to visit a district court in your area and listen to landlord-tenant disputes to get a sense of some potential challenges becoming a landlord will involve.
It is always about location, location, location
The key in purchasing a rental property is location. To maximize the potential of finding suitable renters for your property, avoid rural areas where the number of prospects are fewer and focus on homes in highly populated areas and areas when there already exists high rent properties.
Other advantages are homes that have multiple bedrooms, multiple bathrooms, and a lower than average crime rate as renters prefer safer neighborhoods, particularly if potential renters have children or are planning on having children. Coupled with renters with children is the quality of the school district they will likely attend.
Also consider the selling points of your property. Access to public transportation, shopping malls, and other important locations from your purchased property is key attractions that can potentially generate a greater income and more consistently. For future consideration, these selling points are also attractions to potential buyers of your property if you decide to sell later.
For both potential future renters and buyers, these location points can maximize your return on investment.
Have rainy day funds
Before investigating your profit potential, discuss your investment strategy with potential lenders or perhaps a financial planner. It is necessary that you have the assets needed to absorb the high and lows of entering into the purchase of investment properties. For example, if renting units in an apartment building, consider the entire expense of the mortgage for the property even if all the available units are not rented and providing income. Unforeseen expenses arise when purchasing a property. For example, if the goal is to buy the investment as a rental it may take longer than expected to get the property rented. We suggest maintaining at least 6 months reserves for future mortgage payments on top of estimated renovation and maintenance costs.
Build a support structure
Consider the different challenges purchasing the property will entail and plan accordingly. While deciding on the specific property to purchase, also seek out qualified and reliable contractors who can perform property repairs if needed. An attorney will be advantageous in the event of landlord-tenant issues while an accountant can offer counsel about the tax implications of the overall investment. The day-to-day operations of the rental property can be managed through a property management firm.
The stronger the support structure, the more manageable the property and potential adverse situations will be to handle. What needs to be emphasized is that buying an investment property carries with it more responsibilities than the purchase of your primary residence. Taking this next step needs to be a less emotional and more profit oriented decision-making process. The question to be answered before moving forward is, “Is this the right choice?”
Above six factors would work like a checklist for first time investor who wants to follow a safe approach in purchasing real estate for an investment.