If you’re thinking of buying an investment property, here are the top four factors you need to consider:
1. Projected income. This is probably the most important thing people look at when they’re considering buying an investment property. You probably hope to get a nice return on your investment, but at the bare minimum, you need to cover your monthly mortgage payment. How much rent should you plan on charging? Go by the 1% rule. Basically, if you’re buying a property for, say, $400,000, you should hope to be able to get $4,000 in monthly rent (i.e., 1% of the purchase price). In some parts of the country where properties are less expensive and rents are higher, you may want to follow the 2% rule.
There’s no such thing as a perfect property.
2. The current tenant situation. You don’t want to buy a property on a whim and get stuck in a nightmare situation, so ask yourself: What’s going on with the tenants? Are they paying at will? Are the rents under market? Get some clarity on that situation. You should be able to get a copy of the lease agreement from the current owner. Some properties deteriorate due to mismanagement, so be sure to clarify whether or not the current owner is trying to escape a messy situation and leaving you to deal with a mismanaged property.
3. Overall condition. There’s no such thing as a perfect property. Everything needs at least a little fixing up; it just depends on how much you’re willing to pay to get the job done. A new roof, for example, may be expensive, but it’s not a complicated fix and can be completed in just a week or two. Replumbing the whole house, on the other hand, is a different story. See what you’re comfortable shelling out.
4. Utilities. If you’re looking to buy a multi-family property like a duplex, you need to know about the utility systems. Are the water and electric systems separate for each unit or lumped into one? Things can get messy if they’re lumped into one—how much rent do tenants pay if gas and oil prices fluctuate? That type of thing always affects your bottom line.
If you’d like to talk more about investing in real estate or have another topic you’d like to see me discuss in a future video, don’t hesitate to reach out to me. I’d love to speak with you.