Real estate investment can be a great opportunity financially, especially if you know what to look for in an investment property. There are many different types of investments and just as many financial goals to go along with it.
Over the years I have represented many investor clients. The majority of them have long-term goals in mind – purchase a well-maintained property at a great price, rent it out and let the equity build over the years. These are what I call “buy and hold” clients. I have also represented “flippers,” an investment category that has a lot of caveats and will only be profitable if you know what you are doing and have a reliable contractor who can walk you through it.
I am going to focus here on long term residential property investments, or “buy and hold” properties. Here are 8 tips to help you get started:
1. Sort out all the financial information. The first and most important step to investing is to figure out the financials. You need to connect with a mortgage professional (unless you are paying cash, but consult with your financial and/or tax advisers) to find out not only what you can afford, but what will keep you in a positive income position. This number needs to include mortgage principal, interest, HOA payments if any, taxes and insurance, as well as a maintenance budget and a vacancy budget (especially important if you are purchasing a property for vacation rentals).
2. Location first, then property. Not following this tip is a big mistake for first time investors. Keep in mind that it is not just a bargain you are looking for – the AREA is a major consideration as well. You need to look at appreciation and rental information in the areas you are considering for your purchase. Also keep in mind that location of course will determine rental value – this is important if you have the desire/opportunity to get into vacation rentals. For example, you may find a good deal somewhere off the beaten path, but the rents may not be as high as what you can get if you purchase in a more desirable location close to shopping, dining and transportation. Pencil out all the numbers so you can evaluate.
3. Get accurate rental information on potential properties. Find out what rent you can expect for properties in areas you are considering. Engage your real estate agent and find a property manager if necessary.
4. Factor in maintenance and other costs. Find out how much the current maintenance costs run annually. You will need to take into consideration the age of the property – is it getting close to needing a new roof, appliances; how about the plumbing and electric systems? Many of my investors like newer condos and townhomes because they do not have to worry about these things for a long time. If you are purchasing in a complex that has and HOA you need to study the financial information for the HOA and see if there are any assessments planned. The big ones are usually roofing, plumbing, exterior painting and maintenance. Aging pools and spas can also cost a pretty penny. HOAs will assess property owners to get these items completed. Find out, especially in older complexes, what has been done in the last 5 years and what the budget will sustain moving forward, especially if anything has been identified as needing attention…which leads to the next tip:
5. Create an emergency account. Based on your research, you should plan to have at least 2 month vacancy costs set aside, in case a tenant vacates and you cannot find a replacement right away. In today’s rental market, especially here in San Diego County, this is not so much of a concern due to the lack of available rental property, but it still is smart to have an account for emergencies. You will also need an account that sets aside money for repairs and maintenance, and there are formulas to determine amounts. Remember to discuss with your accountant and financial adviser so you are informed and not surprised down the road with costs you didn’t anticipate.
6. Understand the life cycle of your preferred location(s). This is another important factor. You need to know the phases of the areas you selected – are they slowly gentrifying or already there? North Park and downtown Oceanside in San Diego County are great examples – both have been transforming over the last 10 years and gentrifying. There are a lot of hip restaurants and shops, and many properties have turned over and are attracting a younger crowd. This renewal and regrowth brings higher rents. Those who invested 10-15 years ago in downtown Oceanside, when it catered mostly to the military and was not the tourist destination it is today, really made great investments, as rents and property values have soared.
7. Know the tax ramifications. It is important to consult with your accountant or financial advisor prior to purchasing investment properties. Tax laws could affect deductions and write-offs, especially if you are getting a higher loan. Make sure you understand what tax consequences you may face so you can factor them into your bottom line.
8. Buy with your head, not your heart. Most of my clients purchase property for themselves to live in, so the decision can be (and usually is) emotional. With investment properties you need to use your HEAD, not your heart. It is a completely different way of looking at the purchase. It is all about the numbers and not about falling in love with the property – in fact some investments I have sold were awful looking…but a smart investor sees the potential and knows through research that it will be a smart investment with a little (or a lot of) TLC. You need to see the property from your future tenants’ perspective so that you can grow your wealth.
Property investment can be lucrative if you follow these steps and get advice from your real estate professional, tax adviser, financial adviser and property management professionals.
