Whether you’re investing in a multi-family rental property, looking to flip a house for a quick dime, or purchasing a commercial property in the hopes of attracting high-end retailers, you need to be able to ascertain if the plot you’re looking to buy is worth the money you’re spending, or if it could lead to trouble down the road. But if you’re new to the game, you may not have the tools or experience you need to make such a determination. For this reason, it is important to have some basic evaluation techniques at your disposal. Here are just a few things you may want to consider before you sign on the dotted line and take possession of a property.
1. Have you done a proper survey? Before you draw up a loan agreement with the bank, you need to arrange for a professional assessment of the property. This will include a land survey that ensures the property lines are correctly laid and that there are no disputes holding up the sale. Further, you may need to assess potential environmental threats (especially if the property will house multiple tenants, such as an apartment building). And of course, any structures on the lot should be checked for soundness and safety. Most lenders require this before they’ll offer a loan, anyway.
2. How extensive are repairs or building plans? Beyond the cost to purchase the property, you need to consider how much money will have to be put into it before you can begin to earn money from it. If you’re flipping, this will likely be a set number of some thousands of dollars for immediate upgrades to prepare for resale. If it’s a rental or commercial property, these costs could be extensive and ongoing, necessitating a long-term spending plan.
3. What do you stand to earn from your investment? This is always a bit of a crap-shoot. For most seasoned investors, the 1% rule still holds. Whatever you pay for a property, you must be able to earn at least 1% of that amount on a monthly basis to pay for mortgage and upkeep. So if you buy a $500,000 property, you should be bringing in $5,000 a month. If you don’t think this is possible for the area, the market, or the property itself, then you should probably seek a different investment.
4. Can you hold out for rental or resale? Suppose you are unable to sell or rent the property you have purchased in a timely manner. Hold-ups with renovations are common and due to a poor consumer market, selling straight away simply may not be in the cards. Even renting out a property could take a while. So you have to be prepared to cover costs until then. Calculate your monthly expenses on the property (mortgage, upgrades, utilities if applicable, and so on). Then make a determination about how long you can pay them without earning anything back on the property. This is an absolute necessity before you move forward.
5. Do you have the stomach for real estate investing? Real estate investments can certainly bring in big money, but they can also be a huge source of stress, potentially even leading to financial ruin. If you’re not prepared to face the latter outcome, then perhaps this type of investing just isn’t for you.