Basics Principles for Buying Investment Property

Investment home buyers have dropped off noticeably compared to years past, due in large part to the perception that home prices are artificially inflated and interest rates are high. But home prices seem to have stabilized at least for the time being, indicating that the surge in home prices may not be ‘artificial’ after all. And though not substantially, interest rates have been falling recently. Both of these are promising signs for home buyers in general, but is it looking better for investors too?

I do still get investor calls but not to the extent of, for example 2, 3 even 5 years ago. Bank-owned opportunities have all but disappeared. Rental properties are still selling at a fairly brisk pace and I feel that that the sticker-shock attached to single family home prices has mellowed quite a bit. Having said that, almost all homes on the market are selling quickly right now thanks to a continuing lack of inventory.

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There’s a lot to think about when you decide to invest. First and foremost you’ll need to keep in mind, that mortgage interest rates are higher for the purchase of investment property. Is your intention to flip (buy and resell) the property as is or would you prefer something that needs a bit of a remodel? In either case you need to determine how much the property will cost you and the likely time frame of ownership. Are you looking to become a landlord, owning and renting out single family homes, condos or multi-unit properties? Owning rental properties can hedge against inflation in that rental prices generally increase with property values and right along with inflation. Rental costs come with tax write-offs. On the other hand maintenance costs have risen along with our currently inflated economy. Something to keep in mind for sure.

Perhaps you don’t need financing and you’re buying your investment with cash. Fluctuation in mortgage interest rates will obviously have no effect on your decision. In this case you’d be wise to employ the services of a Realtor to do a Market Analysis or a Real Estate Appraiser for an official appraised value.

One last note: though less common, you may have passively become an investor by inheriting a property that you have no intention of living in. The smart financial move here would be to treat the property just as you would an investment. Consult your realtor or an appraiser and weigh all of your options before you make a decision.

The article below, first published by RIS Media, explains the basics of owning an investment property, what might be of value and what could potentially be a pit-fall. Though ‘basic’, this is good, solid information and a great place to start.

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Basics of Buying Investment Properties

By Kenneth D. Rosen

Everyone wants a magic and immediate path to wealth. The bad news? The path doesn’t exist. Wealth is attainable through more conventional means. If you come to understand the real estate industry and if you deepen your own firsthand experience as you buy and sell investment properties, you’ll be on the road to success.

Along the road, there are six core principles that will make or break each real estate investment deal. They are the most important concepts you will learn. I call them the Big Six. With each successive deal I negotiated, I grew to recognize the common elements. The Big Six are part of a sequenced step-by-step formula that enables you to identify and purchase the right income property at the right price.

The elements of the Big Six Formula that will guide you into the basics of buying income properties are the following:

Location
Location is the single most important component of any real estate deal. It is crucial in determining your investment success. Look for properties that are situated in an “A” location. Such locations include the socioeconomic levels of the people who live or work in a particular neighborhood, its proximity to shopping centers, public transportation, crime levels, the nearness of prestigious universities and medical facilities, traffic congestion, zoning restrictions, the quality of schools, fire and police protection, and even the reputation of the local government and its officials.

Building Quality and Design Efficiency
Design efficiency interfaces with building quality. When you find an investment property you’d like to buy, you will need to scrutinize both elements. Look for properties that far exceed minimum construction requirements and that have useful and innovative design elements. This will not only make the property attractive to tenants but will add value to the property in the future. Design features on apartment complexes that stand the test of time include walk-in closets, large kitchens with windows, and his-and-her bathrooms. In an office building, a common area factor of 15 percent is desirable as well as a ratio of four parking spaces for every 1,000 square feet of rentable space.

Tenant Profile
Tenants can represent either an asset or a liability in an investment. When you invest, your mission is to make sure your tenant profile is the former and not the latter. Just as you want a well-constructed and well-designed property, you’ll want stable tenants who are a good match for your property and have appropriate lease agreements. Find out how much rent is generated and whether it is at market rate or under market. You want to focus on finding an income property that offers the opportunity to increase rental income and, by doing so, multiply the value of the property so that you can resell it at a substantial profit.

Upside
This fourth element refers to the cash flow growth possibilities offered by a particular property along with the likelihood that the property will increase in value. A property may cost $1,500,000 to construct, but if it brings in only the income of a $900,000 property, then it is worth only $900,000. The key to increasing value lies in buying a solid Class B property in an “A” location where the rents are under the market, the leases are short term, and there are no options to renew the leases.

Financing
In the musical Cabaret, there is a song with the lyrics “Money makes the world go around.” It could just as easily be used to describe real estate’s role in the economic landscape. The free flow of money and access to credit is what adds vibrancy to property investment. Before you get started, you’ll need to get a number of finance-related items in order. The first thing you should do before applying for a mortgage loan is to review your credit reports and your credit scores. Also, learn the terms, understand the components of a mortgage and how they interact, and be open to the full range of financing options available. Banks and other financial institutions make money from mortgages. They are willing to negotiate. Be creative—you may be surprised at the terms you’re able to obtain from a bank or insurance companies, especially in today’s low interest rate environment.

Price
The successful evaluation of a property’s price has to do with how much information you can gather about a seller and the property than it does about the price tag on the real estate deal. You must look at the value of the property, which is not the same thing as its price. The crucial concern is not just how much the property costs, but what kind of income it can generate for you. A property may be architecturally perfect and engineeringly sound, but if you’re locked into long-term, under-market lease rates, the value will be eroded.

If you master these principles, wealth will be within reach. However, it’s not enough to just understand and utilize the Big Six. You must execute them in order. That’s because they all fit together snugly to form your customized real estate formula.

Author Kenneth D. Rosen, CCIM, is a real estate investor. Investing in Income Properties, The Big Six Formula for Achieving Wealth in Real Estate, Second Edition is currently available at InvestingInIncomeProperties.com in both hard back and digital versions. It is also available on Amazon and at Barnes and Noble.

This article is intended for informational purposes only and should not be construed as professional advice. The opinions expressed in this article are those of the author and do not necessarily reflect the position of RISMedia. Reprinted with permission from RISMedia. ©2017. All rights reserved.