Toying with the idea of purchasing an investment property? With mortgage rates still very low and existing home market inventories and prices looking good, it is tempting. Finding a sweet little fixer-upper in a great neighborhood has been the dream of more than one starry-eyed hopeful investor. Remember that even if the numbers crunch in your favor and the return on your investment seems to be a healthy, sure thing, hold on! Not all investment properties are equal. Discover a few tips for how to make an educated choice that will yield the maximum return. Please keep in mind these suggestions are for those considering residential as opposed to commercial properties.
Know what you want.
Hopefully you have figured out if you are buying a place to rent for the long term or flip. Being aware of your goals will help direct you to more appropriate listings. For example, are you looking for a condo or small house in a college town to rent annually or a place that would be ideal for first time home buyers? It always comes back to location! Make sure your chosen property’s location is in line with your agenda.
Research the neighborhood.
Doing a thorough check of the neighborhood will clue you into the home’s investment potential. Stay away from so-called “steal deals” in run down, high crime areas in bad school districts. They could bounce back one day, but it’s better not to take chances. Instead research which parts of town are heating up and focus on adjacent neighborhoods. Hopefully, they are somewhat undiscovered and hopefully more affordable – for now, anyway!
Visit a few of the neighbors. Discuss how they feel about living in the neighborhood, how long they have been there and so on. Local knowledge is priceless and speaking with folks who actually live in the community can be very enlightening. For example, you may find out about upcoming proposals for zoning or commercial development. They may also fill you in on things that a realtor may downplay, like traffic, noise levels, and air pollution.
Conduct a few drive-bys at different times of the day. Circle the location from all directions to gauge traffic patterns and congestion levels. Also, make sure to do this on weekdays and weekends. If you only ever visit the property on Saturday, you may be shocked to find out that on Monday morning, there’s gridlock commuter traffic backed all the way up your street.
Do some homework on the homes nearby.
View the surrounding homes with a critical eye. Make observations about how well they are maintained and cared for. It just takes one neglected, untidy residence to bring down property values. Also, consider who you want to have as tenants and whether or not they would be comfortable here. For example, does the neighborhood seem to be full of retired folks, singles, or young families?
Assess the overall location.
Another part of your assessment should focus on the home’s convenience level. Are quality goods and services nearby such as shopping, dining, and entertainment venues? How about schools, medical facilities, recreational outlets, public transportation, and so on? Find out how the neighborhood is served for electricity, sewer, trash, and water. Ask about outages, safe drinking water, and how happy the neighbors are with the current services.
Be aware of additional costs/fees.
Be aware of extra costs that can chisel away at your return. Find out if the neighborhood requires HOA dues. Also discuss if there are any financial assessments on the horizon for items such as roadwork, general maintenance or special beautification projects. For example, failing to dig deep and ask the right questions could cost a bundle later on, when you discover too late about the $10,000 assessment everyone is responsible for to build the new, state-of-the-art clubhouse, pool, tennis courts, walking trails, etc.
Understand the tax burden.
Finally, do your homework regarding taxes and liens that could be on the property. Visit the county tax assessor’s office to identify any proposed rate hikes or reassessments. Also be on the lookout for tax traps, which include, supplemental bills in the first year of ownership, and significantly higher taxes in the second and subsequent years of ownership. Before taking the plunge into an investment property purchase, check on these points:
- How property tax is calculated
- Whether the home will be reassessed upon sale
- When the next scheduled reassessment will occur
- If any exemptions apply
- If tax relief is available
- If the home is subject to multiple property tax authorities
Also be aware that remodeling a home may result in a reassessment. Adding another bathroom, installing a central heating, ventilation and air-conditioning system, or making other significant improvements can result in higher property taxes.
You likely want to get in the property investment game to make a little money rather than spend a fortune!
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