Key steps every investor, novice and expert alike, should take when considering a potential investment property, whether you plan to rent or eventually sell it.
Before acquiring an property that you hope to rent out and/or flip, you will need to do a lot of background research, so as to make a wise decision. You might feel that a particular property is the one, but it's best to look at a number of properties before making an offer on one.
Ask your Realtor to show you several within your price range, including properties you don't like the look of, so you can assess different neighborhoods and have a better sense of your target property's value. After all, the list price is not necessarily the amount the seller expects or would accept, so it's worth getting a sense of the range.
Below are additional key steps every investor, novice or expert, should take when considering a potential investment property.
- Drive to and Walk Around the Area Where You Hope to Buy
- Run a Sales Price Comparison on Recently Sold Properties
- Find Out Market Rental Rates
- Look Into Costs of Ownership
- Obtain Local Statistics Regarding Quality of Life
- Determine Property Potential for Expansion or Improvement
- Examine Relevant Permit Data
Drive to and Walk Around the Area Where You Hope to Buy
If you don't know much about the town or city your target property is located in, it's best to start by getting in the car and taking a drive. This sounds obvious, but investors frequently make poor investment choices by assuming the area where their investment property is located is just like another community they're familiar with. By visiting in person and at length, you can learn things like where the access routes to the highway are, and get a sense of the traffic. You can see whether there is an adequate town center, accessible public transportation, good shopping, or other factors important to your potential renter or buyer.
Does the area appeal to you? Do the nearby properties look well maintained? If you don't like what you're seeing, chances are that a renter or future buyer of the property won't, either.
While you're at it, hit the town hall and find out whether there's any development going on in the community. Understanding local development plans, and whether a flood of people and businesses are moving in or out, can give you a gut check on the current property inventory and future market potential.
In addition to driving, you've got to explore by foot to truly get a feel for an area. Go into local stores and restaurants and talk with the managers about what it's like to do business in the community and/or live there. Call local friends and get their thoughts on the area. You'll be surprised how much people will tell you.
Run a Sales Price Comparison on Recently Sold Properties
Before you even sign up with a Realtor, you can find out what properties have recently sold in the area that match up with the size and amenities you're looking for. A simple Zillow search will show you sold properties within a particular town or city. You can also ask your real estate broker to produce a list of more specific, comparable properties in the area. Knowing how much an investment property is worth will help you gauge its value and determine potential growth.
Find Out Market Rental Rates
If you're going to rent out a residential property, know its true rent potential before you buy. Your Realtor can help with this, and provide comparable sales data. For more information on determining the financial implications of renting out an investment property, see Evaluating Cap Rate: Is That Residential Real Estate Investment Property Worth It?
Look Into Costs of Ownership
To figure out what sorts of costs you'll be taking on, start by finding out the amount of the current mortgage and the last sale price of your target property. Also see if there are any liens on the property. These sorts of information are all in the public record, and in most instances can be found online.
Ask your Realtor to also obtain data on annual property tax amounts and the current, everyday (or every year) expenses of the property, such as utilities and insurance. If it's a commercial property, this should be no problem. For a single-family home, a seller might provide this information if they know there's an eager investor looking for it.
Knowing the above details will help you understand your negotiation boundaries for buying the property, and the price the sellers will likely be willing to accept.
Obtain Local Statistics Regarding Quality of Life
Look at how the town or city compares with other localities in the area. How do the schools stack up? What's the median income? Unemployment rate? What's the population count, and is the community growing? How do the real estate taxes compare to nearby towns?
All this will help you better understand the relative attractiveness (or lack thereof) of your target town or city. Don't forget to check the official website of the town, city, or county where the property is located; many government websites include demographics, crime statistics, and other data. For links, check out State & Local and Municode. Another useful resource is Sperling's Best Places which provides a wide range of statistics by zip code.
Determine Property Potential for Expansion or Improvement
Understand how the property is zoned. Would you be able to expand the existing structures? Convert them for some other use? What are the setback regulations from the street and bordering areas of the lot?
If you have visions of developing the property, you need to know how the town classifies it and the limitations that come with that. If, for example, you want to turn a residential property into a commercial one, a consultation with town managers about zoning concerns is imperative. See, for example, Home Businesses and Zoning Laws.
Examine Relevant Permit Data
Towns, counties, and municipalities are increasingly making data about a property's physical history available online. Or, a trip to the local government administration building can yield results and personal help. Knowing when a permit was actually pulled, perhaps for a furnace installation, or a new roof, will help you determine the seller's honesty when those matters come up during the negotiation. Discrepancies learned can result in actual dollars saved.
Further Reading