Investing in property can be a lucrative endeavor. The historical appreciation rate for the housing market over the last 50 years is over 5%, so if you play it smart, you can make a positive return on your purchase. However, without the right strategy, an investment property can be financially disastrous. Here are few things to keep in mind when investing in real estate.
Home prices vary drastically from city to city and from state to state. Urban properties are generally priced higher than rural properties, but usually offer a better return. First and foremost, make sure you know your market inside and out. If you go outside your area, study up on census statistics and population growth projections for the next ten years. Hone in on properties near schools and public transportation, and make sure to stick to an area with a stable employment market. Keep in mind that many lenders consider long-term appreciation just as important as their monthly return.
Stay away from up and coming areas offering unusually low prices. While its always necessary to buy lower than market value, these areas are cheap for a reason, and even if they do prosper, it will probably take several years.
The type of investment property you purchase depends on what kind of work you are willing to put in. Multi-unit residential buildings require a lot of time and management as opposed to a single-tenant commercial space. Also, physical condition is a major factor, especially if you intend on hiring out the repairs and improvements. Consider properties that are priced lower for cosmetic issues like paint or landscaping. These elements don’t affect a home’s functionality, but they are low-cost improvements that significantly affect overall appeal. Unless you plan on tackling improvements yourself, its best to avoid homes that need a new plumbing system, heating system, or roof.
For new investors, it’s a good idea to stick to the residential sector at least until you gain some experience. Commercial loans have strict application requirements, and the process is much more complex.
When investing in real estate, remember to think long term. Don’t expect to make a profit right off the bat. Even in an active market, it can take several years to earn back what you put in on closing costs. The longer you wait, the more you will profit in the end.
When it comes to investment property, you need to do your research. Make sure you have a firm exit strategy and a long-term plan in order to maximize your investment and avoid a financial loss.