Thinking of buying a home as an investment? Better think twice.
There is a rise in the market of Donald Trump copycats wanting to buy real estate and rent out the home for income with the promise of future appreciation. The idea in it of itself, is a good one. A solid investment in a real tangible asset, that provides a monthly return with minimal hassles.
The issue that arises when investments go bad, is the lack of financial planning in the decision making process.
Many first time investors fall prey to seller's projections of costs and expenses in evaluating the property for purchase. They underestimate the cost of real estate taxes, insurance, maintenance and overestimate the rent potential and vacancy/collection losses. In evaluating any investment, there are 5 key factors to consider: Location, Condition, Market, Timing and Management
Location - It has often been said that real estate is all about location, location, location and following the disaster of the last few years, this notion has held true. Properties located in locations with high population, easy access, nearby retail and within a short distance of employment have been the properties to come back faster than those in weaker locations. Although the prices tend to be higher, the access to tenants in these homes provides an investor shorter downtimes and higher rents. The pool of clients is higher but also more competetive. So placing your unit on the market is not as easy as just placing a sign on the door.
Condition - It appears to be easy to go into a home investment and convince yourself that painting and patching is all that is needed. It is the hidden areas of the property that provide the highest and most expensive repairs to cover. Roof, Central Air, Structure, Plumbing and Electrical are all major areas that when they go bad, can hit an investor hard in the pocket book. That is why it pays to hire a inspector with general contracting experience as well as doing your homework on these items also. A roof can cost you $25,000 if it is in tile on a 2,500 SF home. A new electrical panel can run you $3,000. So unless you are a savvy investor, stay away from homes in need of major repairs. There are plenty of units out there, so you can select wisely.
Market - Determining the condition of the market takes experience, time and patience. Most newspapers report the news after it happens. So using historical information ONLY can be a major mistake. Think about the Summer of 2007. The market until then had seen double digit increases in price and homes were selling faster than coffee at your local Starbucks. But there was a storm brewing in the financial markets. Brokers on the front lines saw it coming and advised their clients wisely. Others stayed in and lost their shirts. It takes a combination of history, present and future trend analysis to determine where the market has been, where it is and where it's going.
Timing - You have heard the phrase "Timing is everything" in real estate this was not used much until the recession of 2007. If you bought and sold during the boom, you did great. If you bought and held on, you did poorly. When buyers are shying away from the market, and the media is reporting only negative results for real estate, that is when the savvy investor moves in and buys their units. Those who know understand that real estate works in cycles, sometimes long and sometimes short. But cycles have their ups and downs. It takes experience and working with a knowledgeable investment agent to help you determine where you are in the cycle. A small glimpse of improvement provides a whole lot of opportunity.
Management - Many, many investors fore-go the use of third party managers in the hopes of saving the fees associated with running their properties. What they fail to realize is that managers know the market, they have the repair experience, they know what to do when things go wrong and they know how to find solutions for complicated issues. When a tenant does not pay their rent and an investor fails to provide the legal documentation to demand payment and tries to evict the tenant on their own, that is when the value of the manager becomes very clear.
One last thought, never buy a property based on what the Seller claiims the future appreciation will be. When buying an investment property, you don't buy on the future, you buy on the present. What do you want to earn? What rent can you get for the unit? What are my costs? What is my cap rate value vs. what other units are sold for? Are there hidden government fees?
Again, rental investment is a solid diversification to your portfolio. But if you plan to take the leap, make sure you have an experienced agent to help pull the cord.
With over 25+ years of combined experience, The Lifter Team and help you navigate through the waters of today's buyer's market and help you make an educated decision on your home purchase. Best of all, you get all of this service for FREE!
When we work with buyer's, our seller's cover 100% of our commission costs. So why would you try to buy your home without us, well that would just be plain silly!
Give us a call - 305-652-5506 x 101
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