We have all heard about this cautionary tale: the dream house turned on-going nightmare unfortunate homeowners can’t manage to sell. Tom Hanks even made a movie about it. But when it comes to investing your money into a real estate property, avoiding a money pit is crucial. Whether you are considering flipping a commercial building and make bank when you sell it or renting it for a regular income, here are some points to consider so you don’t end up paying more than what you bargained for when purchasing an investment property.
Cosmetic repair or structural damage?
Whether you are purchasing an investment property or a primary residence, the biggest mistake a home buyer can make is to fail to identify structural and costly issues in the property.
Fixer-uppers and distressed houses are some of real estate investors’ favorite targets since they are often more affordable and might be priced below market value. However, properties in rough condition are notoriously challenging to finance and can hide issues an investor is not prepared for. Bank-owned and REO properties are often sold as-is and may suffer from differed maintenance. As an investor, you should do your due diligence to make sure that you are not taking on more than you can handle and be ready to walk away from the deal if necessary.
Hiring a good home inspector is a necessary step to avoid some bad surprises down the road. If some cosmetic issues, like an outdated kitchen or old-fashioned wallpaper, are an easy fix, some element should raise red flags.
Cracks in the basement, a roof at the end of its lifespan, or potentially costly repairs like plumbing issues, should be carefully considered. Do not hesitate to get quotes from several contractors to have a clear idea of what to expect to bring the building back to livable condition. Besides, some issues might not be visible during the inspection. A cautious investor should be prepared for the unexpected.
Many “flippers” make cosmetic repairs on buildings before putting them back on the market while ignoring costly, structural issues. Do not be fooled by a fresh paint of coat!
Location, location, location
In real estate, location is everything. One block can make a big difference in terms of the desirability of an area. Although it can be tempting to prospect of the potential of up-and-coming neighborhoods, a real estate investor should proceed with caution. Purchasing a property in the wrong part of town could lead to many issues linked to crime, problems with tenants, and with the future retail value of the property.
When buying an investment property, don’t hesitate to contact the neighbors and drive by the building you are interested in at different times of the day. There might be a noisy industrial complex nearby or issues you can’t identify on a single visit. Visiting town hall to identify any future development project that may affect the property is also a wise move.
If you are considering investing in an area you are not intimately familiar with, make sure to develop a relationship with a local partner to avoid any unexpected disappointments. Unfortunately, location is not something any amount of money can fix, and it will determine how much you can charge for rent and your expected ROI.
Choose your tenants carefully.
If you are planning on renting the property, your future tenants are a crucial component of your potential benefits, which is why you should develop a careful screening process. Although keeping units sitting empty will affect your return on investment, it is often more challenging to remove undesirable renters than to find new ones. Eviction can be a long, costly and nerve-wracking process.
Factor into account the vacancy rate when calculating your potential ROI to avoid having to fill in units with tenants you may not be confident about. Unless you are planning to be extremely involved in the tenant screening and picking process, partnering with a trusted property management company which has access to the right marketing tools, legal knowledge, and practical experience of finding the right tenants, could save you a lot of time and headaches in the long run.
Don’t fall in the trap of over-improving
Between TV shows and vision boards, it is easy to get carried away when it comes to updating and designing a property. However, unlike a primary residence where you should enjoy your surroundings, the primary purpose of an investment property is to provide you with the best return on investment.
To avoid a money pit, choose which improvements you take on carefully to make sure that they match the expectations of your market and your budget. For example, if you decide to put in costly marble countertops in a working-class neighborhood, it is unlikely that you will find tenants willing to pay the higher rent you will need to charge to compensate. If you are planning on flipping the house, you will rarely find buyers willing to take on “the best house in the worst neighborhood,” and you may need to reduce the price at the risk of the property sitting on the market for a long time.
Don’t forget to consider the cost of the replacements you will need to make when changing tenants or for regular wear and tear. Although one can always hope that renters will take care of their property as well as their own, it is better to be overcautious.
Maintaining your property for the long run.
Deferred maintenance can lead to costly repairs. Staying on top of the upkeep will save you money in the long run. Besides, it will help you keep tenants in so that your ROI does not suffer from high turnaround and vacancy.
Daily maintenance is being on call to resolve issues quickly can be draining for a landlord, especially if you are not living locally or do not have the time and inclination for this kind of problems. Hiring a property management company with an established network of contractors and vouched-for professionals can help you save money and energy, and avoiding a money pit r a landlord burn-out.
If you’re unsure of your investment strategy, be sure to seek out the expertise of local resources who can assist in this process. We have a team of experts that are ready and willing to help make sure your investment property is a successful one, just give us a call and we’d be happy to chat with you.