When you buy enough investment property you learn what to look into. While there are a number of things to consider, I find these 7 items will be a great help in making sound investment decisions.
Ask yourself before choosing an investment, “Is this the best location to purchase an investment property?”
I say it daily but it bears repeating, investment property is all about location. You should not look at any properties without first knowing you are looking in the best location. A location that has job growth, population growth and area that is undervalued can sustain growth and cash flow.
Here are the 7 questions you should ask before buying an investment property:
1. Does the area provide for low taxes and insurance rates?
Controllable expenses are paramount to sustainable investments. Markets with high insurance and or high tax rates cut into your cash flow. If they are high when you buy them they are more prone to sharper increases than areas with low rates. High insurance rates for example tend to be in more vulnerable areas and may be prone to tornados, hurricanes, etc.
2. Where is the path of progress?
Once you identify the best city for you, are you looking for property within the path of progress? In other words, which direction is the city growing? If the city is growing to the north corner because a new Toyota plant just opened, then all your commercial builders are adding strip malls and gas stations, etc..
Therefore, this is where jobs are heading and where everyone wants to be. If you purchase in the south end of town, you may lose your anticipated growth.
3. What is the walkability score?
This may be confusing but think of it this way, “What is nearby that would attract an end user to want to live here?”
If you are investing for future growth, you will have an exit strategy where you will sell a house to a retail buyer. This retail buyer will want shopping and movie theaters and schools nearby.
When an end buyer has everything they want nearby, they are willing to pay full retail. To get the capital growth you are looking for, and to fully know your exit strategy is solid, it is imperative that you begin with the end in mind and consider all these factors.
4. Is this an undervalued market?
The U.S. as an average considers a house that you can buy and pay for with three years’ worth of income (based on median income) to be considered as a balanced market, or basically 33% of your annual income to pay for a house.
When you you can buy the median priced house for less than 33% of the median income it is considered an undervalued market and prone to higher growth potential.
5. Why do you consider this property be the best cash flow property?
OK, now you can look into the property itself: The structure, the condition and the shelf life of the roof and HVAC and all that stuff (yes, for purposeful investors this concern comes down further on the list.)
With all this considered does the property generate the cash flow you are looking for?
6. Do you have access to GREAT property management?
Every investor knows the return on investment is made or broken based on the property manager. You want to have options and want to interview the property management thoroughly. No second best is acceptable here. This is your financial portfolio, so choose wisely.
7. Baby Boomer and or millennial appeal?
The two largest segments of renters and buyers are the baby boomers and the millennials. Knowing what these two groups want and catering to their housing needs will help you to have a strong renting market as well as a strong execution of an exit strategy of selling to the retail buyer for top dollar when the market suggests it is time to sell.
The road to buying an investment property is, and should be, paved with many questions. Do the hard work before you invest – think location – and you will improve your chances of success.
For more information on real estate investing, contact the Equity Builders Group at 941-718-7761.