Q: Should I buy an investment property now? And what kind do I look for?
A: Yes, Yes and another Yes!
Various strategies can be used on the road to real estate wealth. In one, investors “flip” properties by buying a house, renovating it in short order and selling for a profit. In another, investors purchase the property with the intent to hold it for many years.
A common approach is to purchase an income-producing property such as a single-family home, an apartment building, an office or retail building or farmland with the intent to rent the property or units within it. By having tenants, investors benefit from not only any appreciation over time, but also the rental cash flow. There’s also some inflation protection because as operating costs increase, rents can increase as well.
The downside: Investment in real property — unless you’re buying shares in a real estate investment trust — isn’t as liquid as putting money into the stock market. And real estate markets are often cyclical in nature.
What to watch out for:
Overpaying for the property
Good research is the key to avoiding this mistake. You make your profit when you buy, in most cases, because you buy below market value. Some investors can profit by buying properties that need a little work. Properties that have positive cash flow without any required repairs may have areas for improvement. This make mismanaged properties attractive investments.
Overlooking rules and regulations
Rules abound in the housing sector, from federal fair housing regulations to laws that spell out how lead paint is to be disclosed. The fines for noncompliance can be hefty, so do your homework. Also, be aware of a property’s building code issues.
Not screening for good tenants
Check tenants’ credit and their employment to make sure they can afford the monthly payments. Also, the longer a tenant stays the better. Every time a renter moves out and a new one moves in, it costs about two-and-a-half months’ worth of rent.
Taking on too much, too soon
You may want to start small, perhaps with a duplex, to decide whether this type of investment works for you. Also, don’t go overboard on improvements. Major spending in areas that won’t provide a decent rate of return on investment cuts into your bottom line.
Entering into a bad partnership
Many investors partner with others to afford a purchase, but you’d better be comfortable with the arrangement. Sometimes a partnership teams up a novice with a real estate professional who has knowledge of the business. Especially for the newcomer in this scenario, review a real estate investor’s past performance before agreeing to work together.