Top 4 Things to Look For in a Property
When you're getting ready to close a deal on a property, it's easy to get overeager to sign on the dotted line. But wait! Purchasing a real estate property is serious business, and no matter what price you're paying, you owe it to yourself to check over this list of things to look for in your potential new property before you close that deal.
1. The Capitalization Rate
The capitalization rate, or cap rate, is the estimated annual operating cost of your property subtracted from its current market rate (or how much rent you can reasonably charge). This is particularly important if you're planning to be a landlord or property manager, but it's also important to consider for any property you own for any length of time. You always want to have a property with the highest possible cap rate.
The cap rate involves a number of factors, including property taxes, utilities (if you choose to pay them instead of your tenants), maintenance, and so forth. You'll also have to know the actual value of the property, which an appraiser should be able to determine. But once you calculate the difference between cost and profit over time, you'll be able to make an intelligent decision about what the property is really worth.
2. The Neighborhood
You know the adage: location, location, location. Any waterfront property, for example, will be inherently valuable as well as property that's located near parks, green spaces, downtown centers, or other desirable locations.
But consider other things about the neighborhood, as well. If your property is likely to appeal to families with children, what are the local school systems like? Is the property located near major public transportation lines, and are those lines likely to exist in the future? If you're considering renting the property, what do local vacancy rates look like, and are there factors (like a nearby university) fueling those rates?
No neighborhood is completely perfect (and if it is, you'll likely be paying an arm and a leg for the property). But some are definitely better than others, and their comparative worth may be set to change over time in ways you can predict. You can also find ways to offset some of the less desirable features of a neighborhood — sacrificing yard or patio space for a driveway in a neighborhood with crowded or expensive street parking, for instance.
3. Your Future Development — and the Neighborhood's
As you consider closing a deal, don't forget about the possibility of buying up neighboring homes, buildings, or lots. If other property is available in the same neighborhood, you may be able to develop it, as well, which allows you a substantial amount of control over the area. And by creating several valuable properties, you have the potential to substantially raise local real estate value and provide an impressive return on your investment.
But don't forget about other property owner's projects. Do your research and look into potential projects under discussion or in progress nearby. These also have the potential to affect property values once they're completed. And if an area is undergoing substantial development all at once, snapping up a property early on can mean a rapid return on your investment.
4. The Property Itself
This applies most obviously to properties that have already been built upon, but even vacant lots deserve a careful eye. What exactly are the features of this property? Will you need to replace the roof? Is the plumbing good, or are there any leaks?
Your future plans for a unit are important. How can you improve your investment? This may be something relatively small, like a kitchen remodel, or it may be larger in scope, like adding rooms or stories to a house.
How does the property fit into your long-term goals? If you're planning to flip a house, for instance, you may want to pick a house that needs a lot of work to maximize the return on your investment. If you'd prefer to rent out a unit, you should think whether this would be a unit that (for instance) a single family would inhabit for a long time, or if you'd need to be ready for a long string of brief tenants.
Finally, what about the actual lot itself? Is it low-lying or near a river or other major waterway that has the potential to flood? Is this area prone to natural disasters like hurricanes or tornadoes? Find out if any factors exist that could mean high insurance rates, now or in the future. By determining the answers to these questions early on, you'll be able to figure out the potential — and risk — involved in your potential purchase.
Buying a property is a big investment and a major commitment. You need to make sure you keep your eyes open as you enter into any deal you make.
But don't worry. Almost all properties, especially those which have already been developed, are going to have some problems. But with good planning, research, and looking out for the most common property challenges, you'll be much closer to having a full picture of all the pluses and minuses in your potential investment.
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