Global Advice Center

How to Buy Investment Property

Posted on May 16, 2010 06:35:36 AM

Do you want to know the best piece of advice ever given with regard to investing in real estate? It’s not “location, location, location.” And it’s not “buy low, sell high,” though that should be your plan.

No, the best investing tip for property investors is to do your homework.

Many people flocked to real-estate investing in the last 5 years because they heard that it was an easy way to make lots of money. But guess what? Most of those people lost money instead, because they didn’t do their homework.

Doing your homework means due diligence and research, and figuring things out strategically and financially rather than simply based on what’s exciting. The first step in your research, once you’ve decided to invest in real estate, is to be honest with yourself and decide on your financial goals and investment timeline. You’ll need to have this basic gameplan of what you want to get out of your investment–and how quickly–before you can even begin to decide what investment will get you there with an appropriate mix of expediency and safety.

Next, you must determine what kind of property to invest in. You could buy vacant land and improve it with landscaping or custom structure, buy a house, condominium, or apartment complex to rent out to residential tenants, commercial or industrial properties to rent out to companies, or even farm/ranch land for agriculture or livestock.

Each type of investment property offers its own potential for profit, but realize that due to the way investing markets work, generally speaking more risk will come with the chance of additional profit. Conversely, if something is very safe it isn’t likely to be as profitable–but it may be more reliable as a steady income stream. For this reason, beginning investors in the real-estate market should usually start off simple, by buying a house or small apartment building to rent out to residential tenants.

After choosing the type of property, you should next determine a location to invest. If you’re investing in the United States, choose the state (probably the one you live in), then a city (preferably your city or a neighboring one), then a neighborhood. This last part–neighborhood–is actually quite important, as the average home values near your investment property will drastically affect its market value and its perceived value to your prospective tenants. In other words, a decent house surrounded by nice ones will make you more money through rentals and selling than a decent house surrounded by fixer-uppers will. Find out what the trends are in the neighborhood, and what the demographic is like. Is it an old and established neighborhood, or is it new and growing? Or perhaps it is shrinking due to a “brain drain” or some other kind of population exodus. These are all factors that will greatly impact the profitability of your investment.

Then, after you decide on a location, you must choose the actual property itself. To do so responsibly, take a close look at the real estate and make sure its pricetag matches (or better yet, is exceeded by) its value. Have it appraised by a third party and make sure you understand all the factors at play. And use your own common sense, too: if the house is in Florida and it has an in-ground pool, that’s a valuable improvement. If it’s in Washington state, however, a swimming pool could be viewed as a liability becuase prospective buyers may see it as a useless add-on that will require work to maintain.

Finally, you should measure all these factors up against each other and make sure they are all in line with your financial goals, timeline, responsibilities and appetite for risk. If, after all of this, you find a property to invest in that makes sense and fits all of your parameters, go for it!