Ready to pull the trigger? Here are a few tips that will enable you to evaluate properties in a smart and systematic way that will help you make the best investment with your time, and your money.
Avoid Buying Sight Unseen
Buying a property out of state has some benefits, but buying a property before it has been seen, is not one of them. It’s your money, and nobody (no matter how much you trust them) will evaluate property with the same vested interest (and focus) that you will. Make the trip before you write the check.
Do the Research
Find out about your potential property: Analyze demographic trends – are incomes going up or down? Population – are people moving in or out? Check with neighbors, and scout around the area. Check comparable listings to get a sense of rents in the area. Is there a vibrant business community? Visit the local businesses, talk to the proprietors…get the real story. People are usually willing to share things about their community. Use this to your advantage. City, county, and state websites can also give you an overview of pending changes to zoning laws and other relevant information effecting property values and rents.
Buy Cash Flow
You want your rental income to be higher than your mortgage payment; sometimes its tough to achieve this, but don’t settle if you don’t have to. Markets are fickle – sometimes rents are high in certain areas relative to purchase price, and low in others. Often, you’re better off investing into a moderately priced property with a decent rent than an expensive house with lower returns impacted by the mortgage rate and investment cost. So shop with a heavy bias toward a positive cash flow.
Distance = Cost
The further away you live, the more expenses you will incur. Due to the time and travel expense for you to visit your property, you will need to rely more heavily on local resources to manage your property. That cost should be factored in…perhaps consider adding a 1% cost factor for every 500 miles away from the property you live. Next month we will discuss property management companies.
Be Wary of Unusual Risk
College houses, vacation rentals, low-income houses, or other properties that may come with transient occupants or tenants without solid credit carry additional risk, and should be evaluated appropriately. Short term sub-leasing is rampant these days with services like AirBnB, so prepare to factor that in if the property lends itself to vacation stays. If you invest in high-risk properties, you should budget for tenant turnover, which leads to higher than average maintenance, repair, marketing, and legal costs.
