4 Things You Should Know About When Evaluating a Real Estate Investment
Not all properties are created equal; some will get you in debt while others will get you such a fast ROI that you’ll sit there with your eyes popping. But, how can you know which one is which?
For everyone who is looking into buying a rental property, there are four necessary things to consider before purchasing. The four essential elements to consider are:
• Current Market
Evaluate the Location of the Property
When evaluating a potential investment property, location (and everything about it) is one of the most important things to consider. Things you want to pay attention to are:
• What the neighborhood is like (e.g., whether it’s safe, is it expanding or declining, are the properties nearby new or old, etc.)
• Is the property urban or suburban
• Are there hospitals, transportation hubs, retail shops, and schools close to the property
• Is it the property fit for families/students/single people/seniors/etc.
• How far is it from your current residence (if not, factor in travel costs on the commute)
Evaluate the Property's Financials
Financials always play an important role when buying property, so you want to know your budget before anything else. Once that’s sorted, consider the following:
• How much can you put in and afford to lose when it comes to this investment
• Where will you get additional funds in case you need them
• What are the monthly mortgage payment and the interest rate you are looking at
It’s essential that you inspect the value of your property as well. Ask the current owner to see the expense sheets for the property. In case they aren’t currently available, consult with an expert to reasonably predict any operating costs. Start by calculating the NOI (Net Operating Income) for the property by asking the following questions:
• What is the standard vacancy rate for your area
• What is the projected rent for the property
• How much would insurance cost
• How much will property maintenance cost
• How much are taxes
Further, consult with a local real estate broker to determine your market’s Capitalization Rate (Cap Rate). Once you get that information, divide it with the NOI to get the current value of the property.
Evaluate Potential/Necessary Repairs
If you are buying a property that has never been lived in, chances are you won’t have to spend too much money (if any) on repairs. However, if that property has been occupied before, get a thorough evaluation of the current state of the property for potential maintenance such as for electric, plumbing, walls, floor, etc. Then, calculate everything to see if you are comfortable with the amount you’ll have to spend on those repairs.
Helpful tip: Set a construction budget for materials and craftsmanship before saying “yes” to any repairs – significant or moderate – on your property. It should help you stay within your budget limits. Factor in unexpected expenses and repairs.
Compare the Current Market with the Value of Your Property Investment
The property market is very fluid, and you need to be on top of the prices to be sure you’re investing the right type of property. What you want to be on the lookout for? Any property that can be easily bought and sold regardless of the market! Desirable markets like these will always be in demand.
While we understand you may be eager to buy a property, do consider the above first. For more information, you may reach us at info@LLCPM.com