9 Questions to Ask When Purchasing an Investment Property
If you are looking for ways to diversify your investments, build additional streams of income, or put your home’s equity to work for the long-term, you may be considering a real estate investment. While you may think that this is a simple process of identifying a likely property and posting an ad for a renter, there’s actually much more to the process. Here are nine questions you should ask yourself as you begin developing your real estate investment portfolio.
1. What type of real estate investment model will you pursue?
There are a variety of ways to invest in real estate. You may choose to purchase an undervalued property, fix it up, then offer it for resale. This short-term investment is called a fix-and-flip. Alternatively, if you identify a property that you may want to keep long-term, especially if it’s in a good rental market like a college town or close to a military base, you may want to pursue a buy-and-hold strategy. If you are focused on a resort area or a popular vacation spot, you may be interested in a short-term rental or Airbnb investment.
2. What types of updates are needed for a flip?
Generally, you’ll want to add value to a flip while keeping a close eye on profitability. You’ll need to complete any needed repairs and updates quickly in order to minimize the carrying costs of the property, including mortgage payments, insurance, and taxes.
Often, flippers will favor low-cost, high-impact cosmetic improvements to enhance the marketability of the property and increase its appeal to potential buyers. Remember, you are not choosing fixtures and finishes based on your own personal preferences. Let cost, availability, and market impact guide your choices.
3. What types of updates are needed for a buy-and-hold investment?
Often, buy-and-hold investors put less time and effort into cosmetic upgrades in favor of getting the property market-ready and occupied as quickly as possible. A buy-and-hold property may be ready to go on the rental market with only a deep cleaning and lawn cleanup. If you are in a competitive rental market or if some of the home’s systems are significantly out-of-date, you may want to make needed repairs or updates before bringing in tenants in order to save time and money down the road.
4. What should you consider when investing in a short-term rental property?
Short-term rental owners focus more on the location of the property along with the number of beds it will hold and the number of value-added amenities they can include. Part of the expense in preparing a short-term rental for the market is furnishing it comfortably and adding dishes, linens, and other accessories. Upgraded fixtures and finishes are often included in order to make the property show better on reservation portals and to ensure more favorable guest reviews.
5. How will you manage and maintain the property?
For long-term and short-term rentals, you will need to consider whether you want to live the landlord lifestyle or turn the responsibility over to a property management company. If you are handy and looking for something to do with your time, you may feel comfortable coming out for late-night repairs or onboarding renters. Otherwise, a property manager can provide needed expertise and round-the-clock assistance, resulting in greater tenant satisfaction and retention.
For short-term rentals, you’ll also need someone to clean and prep the property between guests, sometimes in a matter of just a few hours. Talk to your property manager or to a cleaning and linen service to ensure that they have experience working with short-term rentals in your market.
6. How will you find renters for your property?
You may be considering putting your property up on Craigslist or putting the word out to your Facebook friends when you have availability. It’s often a better idea to work with a leasing agent or through your property manager to find well-qualified tenants who have been thoroughly screened and vetted before moving into your property. Remember, it is far cheaper to properly market a property and check out a tenant ahead of time than it is to evict someone for non-payment or repair damage from a bad renter.
7. What limitations and requirements will you put on your renters?
Will you allow pets? If so, will there be restrictions on size or number? Will you require the tenant to maintain the lawn? Will you charge a co-pay for needed repairs? There are many things to consider before you rent out your property and you’ll need to ensure that they are adequately spelled out both in your initial marketing materials and in the rental agreement. Talk to your leasing agent or property manager about the common policies and restrictions in your market.
8. What will you provide as part of your rental property?
Will you pay some or all of the utilities? Will you pay the HOA or condo fee? Will you pay for pool maintenance, lawn care, and pest control? Weigh the impact of paying some of the costs associated with property upkeep against the liabilities you’ll incur if the tenant does not properly maintain the home and grounds. You may find that it is more cost-effective in both the short and long term to charge a slightly higher rent and do more of the dirty work yourself.
9. What is your long-term real estate investment goal?
Do you want to consider adding to your property portfolio? Do you want to eventually consolidate your holdings into a duplex, triplex, or quad? Do you want to own properties exclusively in your local market or branch out into hot rental markets in other parts of the country? Consult with a trusted real estate professional for advice and expertise you need to make better decisions both now and down the road.
The Cindy Slack Team has distinguished themselves as leaders in the Simi Valley real estate market. They assist buyers looking for a new home and aggressively market homes for sale. Give them a call today, 805-207-9206, and discover the difference they can make during your family's move.