Wednesday, May 15, 2013

The “In’s and Out’s” of Investment Properties

The “In’s and Out’s” of Investment Properties
By: Austin Wentworth
Investment properties are my main attraction to real estate. With opportunities to take properties that are not living up to their full potential and invest into them in hopes of a higher return is a challenging, yet rewarding task. Although there can be huge upsides to having investment/ rental properties, there are also commonly overlooked details that can really cost you in the end if you are not careful. There are many factors that investors should take into account for potential properties, and several details that need to be addressed in order to see the return you hope for.

When you make the conscious decision to find an investment property, it is an exciting, but also a strategic time in the search for the best property for you. You may find yourself not knowing every detail about purchasing a home, and think you need a real estate agent. It is better to wait on hiring a real estate agent until you have taken the time to educate yourself and make knowledgeable, unbiased opinions on perspective properties. Realtors are a great asset in purchasing a home, but they can also be incentive driven by their commission and at time, rush your decision. One of the most common mistakes made by investors is their property’s location. When purchasing a property, you must ask yourself whether you plan to personally manage the property or pay someone else to manage it for you. If your answer is, personally manage the property, and then you will want a location that is within a reasonable distance to where you live.

When deciding to purchase an investment property, everyone wants that property to be a profitable one. There are several factors that you need to analyze as an investors, some more obvious than others. A neighborhood in which the property is located is a crucial piece to what kind of property you are looking at, and also what kind of tenants you can expect to have. You need to pay particular attention to the situs; situs is considered to be the aspect of location that contributes to the market value of a real property, which will have a direct correlation with property value. Certain factors that can considerably increase a properties worth include: Good schools, parks, and accessibility to shopping centers, movie theaters, etc.

Now that you have found a property with all the measurable that you want, it is time to take a critical look at this property. . You will want to look at your prospective property extremely closely for cut corners in the past, and any work that will need to be done in the future. A property with high capital expenditures coming in the near future can kill any NOI you wished to have secured. Another issue that many investors face is a poorly written lease that is not specific enough. Be sure to draft a written lease that is specific, and clear on the expectations of the tenants and any recourse that will be taken if any clauses within the lease are broken. A common mistake that investors/ managers make is not properly accounting for vacancy within the year. If you own a property with multiple units, it is possible that you may have vacancy within the year, and you must account for this percentage so that you have assets put aside in case you experience a lower NOI than expected.

In closing, it is the investor’s responsibility to do all the needed work that is takes to properly evaluate potential properties. The more you put into the search for a property, the better protected you will be when you decide to purchase the best property for you. This work may seem like too much at the time, but the more you understand the risks and rewards of investment properties, the better prepared you will be to successfully manage your property.

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