Last Updated on January 4, 2021 by HortonTeam
Purchasing an investment property can be one of the most valuable real estate transactions that you’ll ever make. It can also be one of the most risky. Take a look at these important items you should consider before deciding to purchase your first investment property—they might prevent your new project from turning into an expensive disaster.
Don’t Jump in Too Deep
When finding the perfect investment property, one of the most important factors to understand is that you absolutely can’t get in over your head. Many young (either by age or experience) real estate investors have visions of grandeur, especially with all the HGTV-type shows that are now so popular. It’s OK to have goals and plans to create your own renovation empire, but it’s also important to keep yourself in check, especially if you’re doing a lot of the work yourself. Falling behind schedule is one thing, but if you’re inexperienced and aren’t sure where to begin and what issues need to be address first, your project can quickly turn into a money pit—or worse. Make sure you do your research before jumping into any investment properties. Instead of building your plans around a quarter-million dollar home, try starting with a small home that is in need of mostly cosmetic improvements. You’ll learn a lot during the process, and you won’t have as much risk as you would with a more expensive home.
Figure Out Your Finances Ahead of Time
One of the most important elements of buying investment property includes having a stable source of income to fund your project. Whether you’re gutting an entire home yourself or hiring a team to manage every step of the process, making sure your finances are in order can keep you out of a lot of trouble. If you purchase a home with cash, then you won’t have to worry about foreclosure, but there are other issues that can arise. For example: if you hire a team to work on the remodeling portion of the project and end up running out of money, the hired workers can file a mechanic’s lien on the home. If that happens, you won’t be able to sell the home until the lien is paid off, and other litigation can arise if the workers sue you or your company. It’s also important to think about taxes; failing to pay off the taxes on the home can land you in hot water with the local assessor’s office and the police department. Whether you’re heading the project yourself or planning on creating a partnership with shared interests, make sure you know where your money is coming from and how much is available before you even start looking at properties.
Decide on Your Investment Property Endgame Now
One thing many first-time investors forget to consider before buying their first investment property is what they’re wanting to do with the property after the remodeling period is complete. There are generally two options: sell the home or rent it out. There are benefits to each option, and the decision must ultimately come down to you, your financial situation, your goals, and what you’re wanting out of the experience. Regardless of whichever route you decide to take, it’s important to know that there are slight differences in how you should approach the remodel. Many steps or logic steps will remain the same—cleaning, not overdoing it with the updates, making the home move-in ready, having all the items or features that buyers would expect, and so on. However, renters and home buyers do have slightly different needs. People looking to purchase a home will focus more on curb appeal and key differences that other homes they’ve seen don’t have. Renters are generally more interested in having all the elements necessary for everyday life and aren’t as concerned about shiny objects. While you should still provide many of the same features and amenities for both types of homes, you should tailor your remodel project to fit the needs of your prospective audience.
Estimate Your Income After Repairs
This last piece of information is especially important for renters due to their elongated connection to the property. Depending on the level of rehabilitation the property needs, your required repair money can differ greatly. This step will become easier the more often you do it, but try your best to estimate what your repair costs would be for the home as well as what an acceptable sale price would be prior to purchasing. If you’re planning on selling the home, this step will help you figure out your bottom line and let you know whether or not you’ll be able to quickly buy another investment property or if you should wait a while longer. More importantly, for those wishing to rent out their properties, this step will let you know the rough profitability you’ll make from charging rent and ultimately if it’s a good idea to hang on to a specific property for renting or not. It’s also important to note that it can be difficult finding out what repairs a specific home needs before submitting an offer. Being represented by a real estate agent is a great way to find this information—you’ll also know if the property you’re interested in is a great choice or a soon-to-be money pit.
These are just four tips, but following them will definitely get your investment property career started on the right foot. Can you think of any other tips for first time investors? Leave them in the comments below. If you’re thinking about starting a remodeling career and would like to learn more or receive expert representation, get in touch with us today at 812-518-0411.