The real estate market is, for the most part, starting to heat up again. Over the past few years there has been an increase in both interest and activity. All you need to do is turn on the TV and you are bound to find a show about real estate investing. However, while anyone can buy a property, it doesn’t necessarily mean they will be successful. You can’t just buy any property, do a little work, and turn a quick profit. There are a couple of rules and guidelines that you should follow. To that end, here are what I believe to be the 5 fundamental rules for buying an investment property:
1. Start with the end in mind: What do you want out of the transaction? Sounds like a simple enough question, but too many investors get started without knowing their end game. Are you looking at the purchase as a short term flip, or do you want to hold it for the long term? How quickly do you want to resell the property? Do you have an idea of what your budget is? There are dozens of questions you should answer before you begin your property search. Things will change with the more properties you look at, but you should have a basic understanding of what you want. If you don’t have a clear vision, it is easy to get pulled in many different directions.
2. Know the market: Before you make an offer, you need to know everything about the market. Buying a good investment property typically requires a lot more work than you may think. Not only should you understand everything about the individual property, but you need to know your market. The market usually indicates how successful the property will be. Even the best properties will be dragged down by a poor market. Conversely, some of the best deals are gained by buying at the bottom in a growing market. Understanding the market means looking at sales price history, demographics, unemployment numbers, tax rate changes, population figures and new housing permits. Read the local publications and see if there are new shopping or entertainment options coming to the area. You can also read if a major area employer is closing or moving out of town. This part of the process is too important to just gloss over, or to assume you have everything you need. To make the best possible decisions, you need to know as much as you can about the market you are buying in.
3. Obtain property records: When you watch rehab shows on TV, it may appear that the buyers are in the property for just a few minutes before making a decision. For starters, these are seasoned investors who know what to look for. Secondly, the power of editing has certainly improved entertainment value. Truth be told, almost every investor spends plenty of time researching the property they are buying. You never want to find something out after you take ownership. Not only should you mind due diligence, but don’t be afraid to take it one step further: look at the recent transaction history and read the listing sheets. This may tell you if there was work done. Go to the local town hall and see if there were any permits pulled for work to be done. It is also a good idea to take a contractor or someone you trust to offer a second opinion with what you have in mind.
4. Understand the numbers: There are many numbers associated with an investment purchase. For starters, you need to know about how you plan on financing the property. This will have a direct impact on the bottom line of the property. The numbers for a hard money loan will be far different than a lender financed property. It is important to know all of the costs and expenses on the acquisition side. If you are rehabbing, you need to be completely comfortable with the expenses and work you want done. If you purchased to buy and hold, you have to know the market rent and where you may be able to increase your bottom line. You also need to know where the market is on the resale side. There are dozens of different numbers, formulas and expenses; To get the best deals, you need to understand all of them.
5. Negotiate: Securing the deal is the final step. You can identify a property you want; but if you don’t close it will go to someone else. Negotiation means more than just making an offer and waiting for the seller to accept. You need to back up your offer with supporting documentation. Making a lowball offer is OK if the property needs thousands of dollars in work. Understanding the numbers behind any deal will only strengthen your negotiations. Negotiation also means knowing when to walk away. It is important not to get so caught up with winning the property that you lose focus on the big picture. It takes discipline to walk away from a property you have had your eyes on for weeks, but is an important part of the investing business.
Strictly following these five rules will not only help you get close more real estate deals, but close the ones that you really want.