6 Steps to Choose the Best Investment Property
Did you know you can find the best investment property even with a small budget? People often think that their price range will keep them from obtaining a quality property, but that just isn’t the case. Whether you’re looking for properties overseas or in the States, you can find something that works with your financial needs with just a few simple steps.
There are differences to keep in mind, of course. For example, most Penang property for sale is going to have a different appeal than a place in Texas.
But, the steps toward getting a property on a budget are pretty much the same, no matter where you go.
So, if you’ve been considering investing in a property for some time now, but you haven’t yet made the jump, keep these steps in mind to make the process easier and to boost your confidence as you become a legitimate investor.
Networking with others isn’t just important when you’re trying to find a job. Talk to other real estate investors in your area (or the area of interest), or look online for the real estate associations in your area.
The more connected you can be in the industry, the more you’ll learn quickly. As a result, you’ll have a better understanding of what sells and what doesn’t, or what tenants are really looking for in a rental property. If you’re just getting your feet wet in the world of real estate, learning from the experience of others will be an invaluable asset.
Know Your Borrowing Needs
If you haven’t already heard of the 1% rule, it’s time to familiarize yourself with it. We won’t get into that right now, because before you even think about the monthly expenses of a property, you’ll need to determine the loan and interest rate you’ll qualify for.
It’s important to understand your borrowing position before you even have a property in mind. That way, you won’t have to give up on something you were already interested in. You’ll know what you can borrow, and you can base your property search off of that. It helps to eliminate stress and can streamline the process of finding a worthwhile property to invest in.
Don’t Automatically Jump On a “Fixer-Upper”
Homes that are in need of some TLC are fairly popular nowadays and for several good reasons. If you have experience in construction or contracting, it might seem like a no-brainer. But, if you’re new to investing, a fixer-upper project might not be the best option for you.
Cosmetic fixes are different. If a property needs a coat of paint, new tile, or refinishing done to the floors, it’ll take little more than your time and some elbow grease. But, if it needs major renovations, you’ll have to hire someone to help, and you could end up falling into a money pit you’ll never get out of.
Once you have more experience with investing and the types of properties that sell or are popular with renters, you can look at giving more of your time and funding to “fixer-upper” projects that might give you a bigger payoff in the end.
Estimate What You’ll Earn
If you’re planning on renting a property, do your research ahead of time. If you’re looking at a property that’s already being rented, ask the owner for the rental history and don’t be afraid to compare it to other rates in the area. That can be a good indicator of whether the owner is telling you the truth or trying to get you to invest in something that isn’t actually profitable.
You can also check out other nearby rental listings online to see how the one you’re interested in compares. There are a few “red flags” to be aware of, including owners offering properties with no credit checks, or giving potential tenants deals like getting their first month of rent for free. There’s a difference between offering incentives and showing desperation. If an offer sounds too good to be true, it might be because they’re struggling to find tenants, and you should avoid that area.
Determining the Cap Rate
The capitalization rate (cap rate) refers to how long it will take you to recoup the money you initially invested in a property. The goal is to look for the highest cap rate possible.
For example, if you spend $100,000 on a rental property and make $5,000 a year from it, it will take you 20 years to get back the money you initially invested – that’s a 5% cap rate, and is on the lower side. The higher the rate, the sooner you’ll get your money back. Getting your money back at a faster rate will allow you to invest in more properties and keep the cycle moving.
Understand It’s Not a Guarantee
Many people make the mistake of thinking that investing is some kind of “get rich quick” solution. The reality is, that’s not always the case – especially if you dive into it quickly without educating yourself on the process first.
It’s a tempting process, for sure, but if you’re going to invest $100,000 in a property and only make 1% a year back in earnings, you can make more money than that doing a variety of other things that aren’t as labor-intensive or stressful.
Of course, that isn’t meant to scare you away. Property investment can be a great opportunity if you’re willing to take the time to do your research. Don’t allow yourself to fall victim to some of the common mistakes of property investing, including:
- Not learning enough about the local real estate market
- Failing to plan all the way through
- Not understanding cash flow operations
- Not having an exit strategy
By avoiding some of these pitfalls and taking your time with learning, you can become an expert investor over time. So, while it’s tempting to jump in right away, it will be worth the wait to follow these steps and remain patient. When you’re able to do that, you’ll typically enjoy a greater payoff and can actually have fun investing in attractive properties.