Sept. 20, 2010

4 Things You Should Know Before Buying Investment Property

investment property,

Hey guys, today I'm going to cover a couple of things you're going to want to take into consideration when looking to purchase an investment property that yields passive income.  In this market, there are some rock  bottom prices and record low interest rates, creating a golden opportunity to buy, and rent out the property for profit.  Here's my advice...

1)  Know the market.  As a buyer, it makes sense for you to work with an agent as you don't pay them anything and they are entrenched in the happenings of the market, day in and day out.  Though you might think you've done your research by checking out a few websites or driving by a few listings, keep in mind, a buyers agent lives and breathes the market and can spot deals and would-be disaster properties a mile away.  Foreclosures, REOs, FSBOs, mother-in-law suites,  motivated sellers, they see it all, all day.  Did I mention it was free to work a buyers agent? :)

An additional benefit of using an agent is they'll have a better idea of areas that appreciate more than others.  More equity equals more dollars in your pocket.

2) Talk to a lender who specializes in Bellingham wa home loans.  It's important to know prior to searching, what you can afford and what the interest rate is going to be. Paying $800/month in mortgage compared to $1200 /month could mean the difference between profit and loss. Chat with a few different lenders to see who can get you the best deal.

3) Consider maintenance costs, taxes and vacancy periods.  Depending on the property, it may require a bit of  up keep. From lawn care, to plumbing, electrical, garbage disposal, washing machines, etc know what you're getting yourself into.  This is why getting a thorough inspection prior to purchasing is necessary.  A leaky roof now could cost you thousands down the road.  Also consider the fact your property might be vacant (collecting no income) for a period of time.  Though a real estate agent will help you find a property that has a strong "rentability" value, plan for at least a month of vacancy in your rental per year.  Though this likely won't be the case, you're better off making more than you anticipated than less.  The last thing to consider is taxes.  Every property you'll own will have both property and income taxes you'll have to pay. Know your costs and know your estimated income.

You can use this standard equation:

(monthly rent)  + (anticipated property tax) + (anticipated maintenance costs per month) - monthly mortgage = gross investment income

Calculating equity will depend on the changes in the market, which leads to my next point...

4) Know when to hold and when to sell.  When the market tanked in 2008, I had a good friend who bought with the intent to flip, dropped around $30,000 and 500 hours of work into his investment property yet because of the market, the home quickly lost value.  As a result, the home was now valued at less than what he purchased it at, despite adding $30,000 worth of upgrades. Unable to make the interest only payments (took out interest only loan), he had to sell as a short sale. Money and time gone!

Though this situation was very unlucky in terms of the market bombing, it yields an important lesson; know what you're getting into before you get into it.  Understand the best case and worst case scenarios and plan accordingly.  Though it's not always possible to know what's going to happen with the market, it is possible to have a disaster plan if something does occur.

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