Many see real estate as a lucrative vehicle for investment. If done correctly, utilizing this method can produce handsome returns; if done improperly, the risk exposure can be paramount.
The first step in evaluating real property is to understand your investment criteria and evaluate potential properties based on that criteria. This criteria should include at a minimum: preferred asset type and neighborhood(s), holding period, financing strategies and opportunities to add value.
The asset types that are best for investment are properties that would limit your risk. In other words, an investor should look into purchasing an asset comprised of the most units the investor can purchase within their buying power. One should seek an asset that has minimal building risk. This means that the condition of the building should be in the best shape possible to minimize the amount of improvement required to ensure all units are habitable. Savvy investors may go after buildings that are dilapidated and functionally obsolete, but as a budding investor it’s best to limit the amount of sometimes hidden and costly repairs that come with buildings that require extensive renovation.
Be sure to evaluate preferred neighborhood(s) when searching for an investment property. With today’s housing trends, renters prefer a highly dense community and walkable neighborhood with easy access to restaurants, coffee shops, grocers and other quality retail.
One should evaluate how long they intend to own, operate and improve the property. Typically the holding period for investment valuation is five years. The investor should detail rental and other building revenue and compare that against the expenses of the building. From there, the investor can see how the asset performs. If the net income, or residual earnings after all expenses have been deducted from sales’ dollars is strong, the asset should be a good contender for investment.
Financing can also be a large hurdle that some beginning investors have trouble passing. An investor would need to meet the credit standard that their preferred lender has set, have 6 to 12 months of cash reserves and the property must be habitable. It’s best to speak to a lender to understand their requirements.
Cash is king when it comes to securing properties that are not habitable and is sometimes the best option to acquire properties that require substantial renovation. There are renovation loans to improve property, but many times owners of dilapidated properties are interested in unloading their properties quickly. These renovation loans can take a longer time to reach closing, which is seen as a burden on the owner if they don’t intend on improving the building.
When acquiring property, one can add value by lightly improving already habitable properties with higher-end finishes to command higher rent. Also, investors/landlords should properly evaluate tenants with credit checks, background, income and employment screening to ensure the landlord-tenant experience is positive throughout the duration of the lease.
Investors should evaluate investment properties based on sound market data to ensure the investment is lucrative and not an incredible burden once possession takes place. This will certainly limit the budding investor’s risk.
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