Reduce Risk and Maximize Profit With These Five Tips
Investing in a home is a huge decision. While real estate can be a lucrative business, it comes with a certain level of risk. Before signing on the dotted line, it is important to appropriately prepare and educate yourself in order to help reduce this risk. Here is a list of things to do before purchasing your first investment property.
At the beginning of your investment property journey should be a host of research. Buying a home, especially one you are looking to turn a profit on, involves considering a variety of factors--particularly because you must make the purchase with the mind of an investor rather than a buyer. You are not buying the home for yourself; you are buying a house that will appeal to someone else: your client.
Research the location, surrounding schools, nearby amenities, and anything else that a potential buyer would look for in the area surrounding their home. The importance of these items will all depend on the type of client you are trying to attract as well as the area you are looking to invest in, but the bottom line is to do extensive research into the desirability and/or potential of the area to help ensure a worthwhile investment.
As important as research is, ensuring you have the liquidity available to make a purchase and take care of maintenance and improvements is crucial, too. First, you will need to consider how much money you currently have as well as how much you’ll need to borrow. Then, balance that out with what you estimate you will make on the property once it starts generating revenue.
If you do need to borrow, you should consider that mortgages for investment properties require a larger down payment and have stricter requirements. Expenses for any renovations should be overestimated, as budgets can quickly inflate when construction begins. Finally, once the property is purchased, renovated, and ready to be lived in, you must consider operating costs and how much you’ll need to keep the property running.
Pay Down Debts
Experienced investors may carry debt as part of their investment plan and portfolio; however, first-time buyers should avoid it. You will likely incur debt in the purchase--whether in the form of a mortgage or other loans--so starting without debt reduces risk and allows you to start off on the right foot. If you have student loans, children with college on the horizon, or any unpaid bills or expenses, an investment property may not be the right move for you at the moment.
Target a Low-Cost Home
For your first investment property, it may be wise to start with a low-cost home--even if you are financially prepared to spend more. Starting in a lower investment range allows you to gain investment property experience, from the initial stages and purchase to the renovation and maintenance to keep costs and risks lower in the case that this first property doesn’t meet your expected profit goals.
In line with researching with the mind of the client, a difficult but necessary thing to do in the investment property process is to remove emotion from the purchase. When buying your personal home, emotion plays a huge part in the decision; many describe falling in love with a home before deciding to buy it. This love can sometimes cause us to ignore certain factors or compromise on location, benefits, etc. in favor of the house itself.
However, with investing, you have to think of it as a purely business decision, where logic will dictate how you negotiate and ultimately turn a profit.
If you are looking to invest in Allentown real estate, contact us today. It would be our pleasure to guide you through the process and help you find the perfect property with which to work.