Getting the most amount of profit from an investment property is not going to come by accident – or luck. Even though some deals will need to be made quickly, there are still some things that you need to carefully consider before buying that piece of property for an investment. By taking into account some things each time before obtaining an investment property, you will be able to be sure to have greater gains and less headaches. First time buyers need to be especially aware.
Consider the Neighborhood
Take a look at the kind of neighborhood the property is in, and determine whether renters are going to be long term, have children, or whether there is a lot of crime around. Changing neighborhoods will have tenants move in and move out quickly. Neighborhoods where there are colleges will tend to have changing residents because students may leave during the summer and go home, says Investopedia.com.
Find Out the Market Value of the Property
You can do this by looking at similar properties, and find out what they have actually sold for recently. A Realtor can help you with this, says StreetDirectory.com, by running a CMA for the area where the property is located, or even for the street the property is on if there’s a lot of sales taking place nearby.
Calculate the Debt Service Coverage Ratio (DSCR)
The DSCR is a number used to indicate the commercial property’s ability to cover the cost of the mortgage. This number is obtained when you divide the net operating income (NOI) by the cost of the annual debt service. In order for there to be a profit, says MRES.com (Multi Real Estate Services), the result should be at least 1.1 up to 1.35, and many financial institutions will look for these numbers.
Don’t Trust the Owner’s Numbers
A seller has everything to gain by fudging the numbers and little to lose. You have no idea whether the numbers are correct or not, so it is a very good idea to verify all of them. You can do this by talking to an apartment owner, looking at public records, and other unbiased sources, says TheCapitalManifesto.com. It is especially important if the numbers seem to be either high or surprisingly low.
Pay Special Attention to the High Cost Items
With any building, replacing items like the roof, the heating or air conditioning units, and renovations, are going to result in high costs. They may be patched and made to run a little longer, but eventually they will need to be replaced and a lot of money dished out. Make sure that you have these items evaluated by someone you trust or by a third party. It is also suggested in the above article that you do the repairs, but get a credit for it on the price. Letting the seller do this could be costly, because they do not need to ensure that it is done right.
Develop an Exit Strategy
Plans do not always go as expected, and you will want to be prepared for that possibility if it occurs. This means that you will have a map of what to do when things start to go south. When the profit starts to decrease, bills get too high, too many renters leave, etc., you should know when it’s time to bailout, and know how you will get out from the burden before it destroys you financially, says Investopedia.com.
The more you know about how to evaluate an investment property, the better off you will be when making property deals. Go into a deal as informed as possible, and you might even work with someone who regularly buys investment properties to learn the ropes and know what mistakes to avoid.