Successful real estate investing demands attention to detail. Careful analysis is especially important for investors who intend to purchase investment rentals or flip a property.
Not adequately addressing all the elements of a real estate transaction can reduce the anticipated return or even result in financial loss. For example, overlooking weaknesses in a property, underestimating repair and upgrade costs, or failing to take the time to understand local market trends can be costly mistakes.
Here are seven essential questions to ask yourself before making a final commitment to purchase an investment property.
# 1 What Are the Risks of Buying This Property?
Every investment has risks. A real estate venture must be profitable to be successful. The purchase price, related costs, and any repairs or renovations must be less than the selling price, or the subsequent rental returns, while also returning a profit to the investor.
An experienced real estate agent can gather information about the property and the surrounding neighborhood to help get a better picture of the property’s investment potential. Data like comparable sales, prevailing rents, nearby abandoned or distressed properties, market trends, and even reliable contractors is critical information when considering a purchase of investment property.
# 2 What Is the Backup Contingency?
An investor’s initial objective may fall through after purchase. Before investing, it is important to have at least one contingency plan should the original plan not work.
For example, an investor buys a property to renovate and flip it quickly. However, the market conditions change, or the renovation costs grow to a point the property cannot sell at the necessary price. In this case, the investor implements his contingency plan and makes the property a temporary rental until market conditions change and it’s flipped.
# 3 What Are the Current Rental Trends In the Neighborhood?
Even though the potential investment property appears to be in good shape and very rentable, it is essential to determine the rental market prospects for the neighborhood.
A professional real estate agent can investigate the neighborhood to gauge average rents, long-term vacancies, abandoned properties, crime rates, and other issues potential renters might find objectionable and prevent them from renting the property.
# 4 What Are Property Pricing And Rental Trends?
Timing is essential in real estate investing. Purchase prices and the rents the properties can justify do not necessarily move in lockstep. There have been times when these two factors have moved in opposite directions.
For the investor, paying a premium for a property while the neighborhood rents are dropping can cause a severe financial burden.
It is essential to have accurate, detailed information about the neighborhood’s current sales price trends and how much area renters are paying. A reliable real estate agent can help to gather real-time data to help with the decision.
# 5 What Is My Competitive Advantage?
Some successful investors find they have a competitive advantage in real estate investing due to a specific area of expertise.
For instance, one investor may have the time and talent required to perform professional repairs and remodels to reduce renovation costs. These skills help increase the likelihood of making a profit on the resale or improve the property’s rental income.
Another investor, for example, may possess significant local market knowledge and benefits from having the ability to spot a bargain or anticipate value-enhancing changes coming to a neighborhood.
# 6 Do I Have Backup Funding Sources?
An essential part of the profitability equation in real estate investing pertains to how you choose to pay for the property. Experienced investors often work with more than one lender as they increase their portfolios. A backup lender is always a good idea because a lender might turn down a deal once it’s under contract.
Multiple lending sources often offer different rates and conditions at any given time. These variances can make a significant difference over a long period.
# 7 Is a Real Estate Agent Essential?
Real estate agents can help you investigate neighborhoods and evaluate properties. In addition, an agent can help assess local market trends, recommend financing, and help with negotiations. The support of a proven real estate agent can make all the difference between success and failure in real estate investing.
Real estate investing is very profitable for disciplined investors who use their strengths and know their weaknesses, thus surrounding themselves with a team of experts to help them succeed. One of these experts on every real estate investing team is a knowledgeable and experienced real estate agent.
We hope you use this list of questions to ask before investing in a specific property to develop a more detailed list addressing all your real estate investing needs.