Buying an investment property can be a great way to either earn extra income or build wealth for the long run. However, before you take the leap and buy a property, you need to ask yourself the right questions to decide whether it is right for you.
Here are seven different things that you should consider before you buy an investment property:
The Type of Financing That You Can Get
Investment properties often do not qualify for the same good deal that you would get if you were looking for a residential mortgage. Lenders will make you pay higher interest rates and could impose several other terms that could make it more difficult for you to profit from ownership. Nonetheless, it is possible to find lenders to give you reasonable terms if your credit is good.
You would need to shop around to obtain the best terms. Oftentimes, the difference between a profit and loss will be the costs that you will need to pay to the lender.
Some differences between lenders may involve the amount of money that you are expected to put down on your property. The terms that you receive depend, in part, on your creditworthiness. The more you are willing to put down, the better terms that you can get.
Your Ability to Earn Rental Income
Something to consider when buying an investment property is how much you can make in the interim during your holding period. Ideally, you are able to recoup, at least, your financing costs by earning rental income.
If you plan on doing anything other than immediately flipping the property, this becomes a necessity. Thus, you should consider the rental market in that neighborhood whether you are buying commercial or residential space.
Entertainment properties are one way of earning income before you sell. These have a ready-made rental market, and you will not be faced with the prospect of being stuck with an empty property and having to dig deep for the monthly payments on the property.
Where the Property Is Located
When it comes to making money on property, it is all about location. Location is even more important than the property itself because you can always fix it up after you buy it.
The location will determine the growth potential of your investment. If the property is in a desirable or an up-and-coming area, you will have less trouble finding a buyer when it is time to cash out and sell. If the property is in an area where people want to be, there is much more of a floor under its price.
It is the other homes and businesses in the area that will eventually raise the price of your own property. They become the draw that will get people to consider renting your property before you sell it and then buying it when you are ready to cash out. The last thing that you want is to be stuck with a property in an area that people are avoiding.
How Much Money You Need to Put Into It
Besides a down payment, you will need to invest in the upkeep of the property, which includes possible improvements. There is almost no such thing as buying and holding property and then selling it for a profit.
Putting money into a property is not necessarily a bad thing. You will almost always get that money back when you sell the property. However, you will need to know how much you must spend because that will factor into your financing. Moreover, it should also impact the price that you are willing to pay for the property because you are looking at the total cost of buying and improving the property.
In addition to improvements, there are other variable expenses that you may have. These can include things such as HOA fees, insurance, and the cost of upkeep. Rarely can you buy and hold a property without some money coming out of your pocket. You will need to factor that into your budget and your profit equation.
How Much of Your Time It Will Take
Ideally, owning properties is a passive investment, and your money will increase without much work on your part. However, some responsibilities and obligations go along with owning property. Here, passive investment does not mean that you can do nothing when you own property.
Since there will be some management of the property involved, you will need to think about how much time you have to devote and how much owning the property will require. You could very well need to be an owner-manager and may need to fit this in with the rest of your responsibilities.
Hiring a property manager is always an option that can help you. However, it costs money, and it could take away from your profits. Before you buy the property, you need to figure out how much of your time it will take and if you have it.
What Is Your End Game?
When you are thinking about what to look for when buying an investment property, you need to think of your final goal and then work backward. You should consider what your desired holding period is and what type of profit you are looking for before you buy the property.
When you are looking at property for sale in Phoenix, you must consider what kind of investor you are and your goals in buying the property. This will dictate what steps you take when buying the property and shortly thereafter. In other words, you need to know your plan ahead of time and work according to it.
Consider the Risks Involved
Buying, holding, and selling don’t always go according to the plan that you have laid out ahead of time. Things happen that can cost you time and money. What to consider before you invest includes thinking about the risks and how your situation can change over time.
For example, the need for repairs could be much greater than you thought when you purchased the commercial property for sale in Phoenix. If you are counting on tenants to give you rental income, they could either end up not paying their rent on time or become a major hassle. Property taxes could also go up, forcing you to pay more each year to the city and state.
The risks increase the longer you intend to hold the property. At the very minimum, you should build some room into both your financial and time calculations to account for the worst-case scenarios. Expecting things to go strictly according to plan is overoptimistic.
To learn more about the best commercial properties Phoenix has to offer, contact LCI Realty today.