7 Questions to ask when buying investment property
Good real estate investors know what the normal questions to ask when buying investment property. Going beyond these basics, I have compiled questions that most investors never even think of or consider. As a purposeful investor your next investment should be more than just some brick and mortar that can produce cash flow for you. You will want it to create sustained cash flow for an extended period of time. Additionally, we are in a market that can have great appreciation when purchased correctly and in the correct market.
So the questions you want to consider before getting into the details of the property are questions around the sustainability of the market place.
- What is the population and how is it trending up or down. You want a market that is growing in size. Growing markets offer sustained cash flow.
- What does the local government have in place (if anything ) to attract jobs and business. New businesses create jobs that create renters and sustainability to cash flow and future capital growth.
- Does the area provide for low taxes and insurance? Areas prone to storms, high wind, earthquakes, etc. are costly to insure. This comes directly out of your cash flow. Same for high taxes. Markets with low taxes and insurance put more money in your pocket each month.
- Is there baby boomer appeal in this market? Baby boomers are spending billions of dollars in their retirement. Appeal to the Baby Boomer market brings population growth, revenue and sustainability.
- Where is the path of progress within the city? If the city is growing to the north, you want to invest in the north end of the city as that is where the money is moving.
- What is the affordability index in the market place? Take the median income and divide by the median home price. You want to be at or below that of the national average. Typically you will not want to exceed a 30% Affordability ratio.
- After determining that this property be the best cash flow property, now you can check into the property itself. Look at the structure, the general condition and perhaps the life of the roof, heating and air and all the mechanic stuff.
Bonus investment property question:
Does the property actually generate good cash flow? Can you charge rent that will give you competitive returns? (most people start at this question without going deeper into the really important ones) If the above questions are not answered favorably, the cash flow does not matter as it is probably not sustainable.
If you do not have sustainability to your cash flow, run from it. Many people generate a piece of paper (the pro forma) that looks good. If it is not a sustainable set of numbers, you do not have a good investment. The above questions will help ascertain if the investment is sustainable.
Bonus Bonus investment property question: (forgive me I have a ton of great questions)
Do you have access to GREAT property management? You want to work with a turnkey property provider that has long term relationships with property management (or does it with their in-house management). Property management will make or break your investment so it is imperative to have great property management.
Darn: that leads to another set of question. What should I be asking about Property management? Find out more in this post...Due Diligence – Property Management Questionnaire.