Due Diligence: Getting The Lay of the Land On Investment Properties
1. Choose Your Investment
Determine whether you desire a long-term property investment or a "flipping" property. Long-term investments produce positive cash flow, increasing your net worth. If you plan to flip, your focus will be on property appreciation and a quick cash return.
- Your profit margin depends on your acquisition cost, and it's important you buy the property at a low price so you can sell at a profit.
- Don't be thrifty with small purchases but wasteful with large costs. If a property is super cheap, the amount you may need to spend on repairs will drive up the cost.
- Have a "what if" plan in place. Even if you buy at a great price and get the property ready for the market, there's no guarantee it's going to sell.
- Partner with an experienced flipper your first time, and consider it an apprenticeship. Your profits will be lower, but what you'll learn will be invaluable.
2. Good Property Characteristics
Research areas that have characteristics to enhance the value of your investment.
- High-quality suburbs close to cities, and properties near business districts or waterfronts are all desirable locations.
- Close to public transportation. People generally like to leave their vehicles when they go to the city. Public transportation no more than 15 minutes away from the property is ideal.
- Lifestyle amenities within 10 minutes of the property. These include malls, schools, libraries, theaters, parks, restaurants, cafes, and gyms.
- Areas that have 35/65 renter to homeowner ratios.
- Low or non-existent crime.
- Available jobs.
- Affordable property taxes.
3. The Lay of the Land
Park your car, and walk around to chat with the residents, shop owners, and anyone willing to share insight on the neighborhood. Check with the city or county planning department to get an idea of what the area's future holds. New strip malls, business developments, or condos mean area growth; these developments are great news. If new subdivisions and complexes are planned, they could drive down your rents, absorb available green space and lower the value of your investment.
4. Research Realtor Claims
Never take a Realtor's claim of "guaranteed rent" as gospel; it could simply be a sales ploy. If you work with a Realtor, and he or she makes such a claim, get second or third opinions from independent Realtors before you accept it as truth.
5. Additional Tips
- Avoid areas that have 10 or more apartment complexes; scarcity is a desirable sales attribute, since rents plummet with an abundance of available units.
- Try to buy the property at least 12 percent below market price. This gives you wiggling room should you decide to sell the property. You'll be able to sell below market value and still pocket a profit.
- Look beyond just dollars and cents, since time is a commodity. The specific property you buy dictates the time required to manage it.
- Several investment property types are very high maintenance, requiring substantial property management. These include college rentals, vacation rentals, and properties in crime-ridden or very low-income areas.
- If you buy a high-maintenance property, you can hire a property management company. They charge under 9 percent of the rental gross and sometimes lease fees as well.
- Be open and friendly with other real estate investors. These folks have great insight into the market, and they are more than happy to spare a few moments to offer advice.
Make sure you go over all available data on the property you plan to buy, and do a thorough investigation to make sure your decision is good. Since knowledge is power, though, due diligence always pays off in the end.
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