The 3 most important questions to ask yourself before buying an investment property 💵
- Published on
- Real estate
Most of us have received a very imperfect education when it comes to investing. Investors often buy a building without fully understanding the fundamentals of whether it will turn a profit.
In fact, we were all given little instruction manuals when we learned to invest - so many people jump in without understanding what they should or shouldn't do at first!
For example, no one has ever told us how a building can produce positive results, which is why many people embark on this type of investment without knowing whether the time and money they devote to it will yield a profit.
What's more, as with any business venture where success is uncertain (largely because you don't know what information might yield better results), so too can real estate investing.
Still, there are three questions you should ask yourself before pursuing any real estate investment strategy. If you can answer them, then it will be easier for you to find properties that will help you succeed. 😇
1.How can I make the most of it?
It's common for new investors to find themselves on the brink of failure. All too often, we see people embarking on an investment without a thorough understanding of how they hope to profit from it.
When it comes to strategy, it's easy to have a general understanding of the process, but failing to understand the subtleties of a process can create gaps on the road to success.
For example, let's say you want to be an investor BRRRR. The process is stated in its name: Buy - Rehab - Rent - Refinance - Repeat.
That's easy enough to understand. But how do you carry out each of these steps in order to generate a profit?
Using this example, ask yourself what makes a successful BRRRR versus an unsuccessful BRRRR.
You'll need to understand exactly what needs to happen and what needs to be in place during each of these stages to create a profitable, paying investment for you.
Similarly, when you're looking at potential properties to buy as part of your strategy, you'll also need to understand the specifics of the process.
For example, suppose you want to buy a rental property. Rental properties are pretty straightforward: buy a property, collect rent from the tenant, keep what's left after expenses and collect appreciation along the way.
Generally speaking, this is precisely how a rental property is valued. But what do you need to know about each step to ensure profitability?
When you're looking to buy a building, there are many factors to consider to determine whether it's a good deal.
An important factor is the price you pay for the property. To make a profit on the building, you need to ensure that the price you pay is lower than its market value.
You also need to take into account the cost of any repairs or renovations required. Once you've determined the cost of the building, you need to calculate the expected cash flow. This includes rent from tenants, as well as any other income from the building.
To determine expected cash flow, you need to subtract all expenses associated with the property, such as mortgage payments, insurance, taxes and repairs.
If the projected cash flow is positive, you can expect to make a profit on the property. On the other hand, if the expected cash flow is negative, you will lose money. In addition to the price of the property and the expected cash flow, you also need to consider appreciation. Appreciation occurs when the value of the property increases over time.
This can happen for a variety of reasons, such as inflation or an increase in demand for real estate in a given region. If you anticipate an appreciation of the property, you should also factor this into your calculations.
If appreciation doesn't occur, you'll have to rely on rental income and other sources of revenue to make a profit on the property.
There are many factors to consider when looking at potential real estate investments. By carefully considering all these factors, you can increase your chances of finding a good deal on a profitable investment property.
2 What are the risk factors?
As any experienced investor knows, any investment always involves a degree of risk. No matter how well you research and plan, it's always possible for something to go wrong and wipe out your profits.
That's why it's so important to understand all the possible risks before making an investment. By analyzing the figures and understanding the profitability of an investment, you can get a good idea of its potential return.
Ultimately, however, it's the main risk factors that determine whether or not you make a profit. So it's crucial to be aware of all the risks before you put your money on the line.
When it comes to selling properties, one of the biggest risks is unexpected repair costs. Even if you've done your due diligence and made the calculations in advance, it's always possible for something to go wrong.
For example, you may buy a property and discover that the foundations need major work. Or you may start the rehabilitation process and discover that the plumbing needs to be completely replaced.
These types of problems can quickly reduce your profits and, in some cases, can even turn a resale project into a money-losing venture.
That's why it's important to always have a contingency fund to cover unforeseen repair costs. That way, if a problem does arise, you'll have the resources you need to resolve it, while making a profit on the resale project.
While not an exhaustive list, here are a few examples of major risk factors for rental properties and turnaround strategies to give you an idea of the kinds of things you should consider:
Unexpected repairs
Bad tenants
Extended vacancy periods
Decline in appreciation due to external factors (i.e. local market or neighborhood)
Property not appraised for value after scheduled repair (ARV)
Market slowdown or crash leading to a significant drop in ARVs
In short, risk is inherent in every investment, and no strategy or property is totally immune to potential losses. However, that doesn't mean you should go ahead blindly without understanding the risks involved.
Before making any investment, it's important to do your research and understand exactly what you're getting into. What are the potential risks? What could happen that could cause you to lose money?
By understanding the risks involved, you can make more informed decisions about how best to protect yourself. By being aware of potential dangers, you can prevent them from causing serious damage to your portfolio.
3 What can be done to minimize these risk factors?
When it comes to real estate investments, returns are never guaranteed. No matter how good your market research or how experienced an investor you are, there's always an element of risk.
However, that doesn't mean you have to accept whatever fate decides to throw your way. There are a number of steps you can take to mitigate the risks associated with your investment.
For example, bad tenants can cause a lot of damage to your property, default on rent payments and increase the cost of eviction.
However, there are some things you can do to try and attract better quality tenants. For example, you can invest in nicer properties in nicer neighborhoods, or have a pre-leasing survey carried out.
Although even the best properties can end up with a bad tenant, the chances of this happening are lower if you choose your properties carefully. Another way to attract good tenants is to provide them with good customer service.
This means listening to their needs and concerns, and providing them with the information and support they need to succeed as tenants.
By taking these steps, you can increase your chances of attracting quality tenants who will take good care of your property and pay their rent on time.
Apply the answers to your investment strategy
Investment strategies are like everything else in life - there's no single answer. The trick is to find the strategy that best suits your goals, risk tolerance and financial situation.
Property investment is a great way to earn money and provide stability for the future. However, it can be difficult to keep track of all the payments and paperwork associated with owning a rental property.
That's where our payment solution comes in. We can take care of all the payments for you, so you have more time to concentrate on your investments. After all, what's more important than the real money in your bank account?
Contact us today to find out more about how we can help you free up your time and improve your results. 💰
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You'll need to understand exactly what needs to happen and what needs to be in place during each of these stages to create a profitable, paying investment for you.
Similarly, when you're looking at potential properties to buy as part of your strategy, you'll also need to understand the specifics of the process.
For example, suppose you want to buy a rental property. Rental properties are pretty straightforward: buy a property, collect rent from the tenant, keep what's left after expenses and collect appreciation along the way.
Generally speaking, this is precisely how a rental property is valued. But what do you need to know about each step to ensure profitability?
When you're looking to buy a building, there are many factors to consider to determine whether it's a good deal.
An important factor is the price you pay for the property. To make a profit on the building, you need to ensure that the price you pay is lower than its market value.
You also need to take into account the cost of any repairs or renovations required. Once you've determined the cost of the building, you need to calculate the expected cash flow. This includes rent from tenants, as well as any other income from the building.
To determine expected cash flow, you need to subtract all expenses associated with the property, such as mortgage payments, insurance, taxes and repairs.
If the projected cash flow is positive, you can expect to make a profit on the property. On the other hand, if the expected cash flow is negative, you will lose money. In addition to the price of the property and the expected cash flow, you also need to consider appreciation. Appreciation occurs when the value of the property increases over time.
This can happen for a variety of reasons, such as inflation or an increase in demand for real estate in a given region. If you anticipate an appreciation of the property, you should also factor this into your calculations.
If appreciation doesn't occur, you'll have to rely on rental income and other sources of revenue to make a profit on the property.
There are many factors to consider when looking at potential real estate investments. By carefully considering all these factors, you can increase your chances of finding a good deal on a profitable investment property.
2 What are the risk factors?
As any experienced investor knows, any investment always involves a degree of risk. No matter how well you research and plan, it's always possible for something to go wrong and wipe out your profits.
That's why it's so important to understand all the possible risks before making an investment. By analyzing the figures and understanding the profitability of an investment, you can get a good idea of its potential return.
Ultimately, however, it's the main risk factors that determine whether or not you make a profit. So it's crucial to be aware of all the risks before you put your money on the line.
When it comes to selling properties, one of the biggest risks is unexpected repair costs. Even if you've done your due diligence and made the calculations in advance, it's always possible for something to go wrong.
For example, you may buy a property and discover that the foundations need major work. Or you may start the rehabilitation process and discover that the plumbing needs to be completely replaced.
These types of problems can quickly reduce your profits and, in some cases, can even turn a resale project into a money-losing venture.
That's why it's important to always have a contingency fund to cover unforeseen repair costs. That way, if a problem does arise, you'll have the resources you need to resolve it, while making a profit on the resale project.
While not an exhaustive list, here are a few examples of major risk factors for rental properties and turnaround strategies to give you an idea of the kinds of things you should consider:
Unexpected repairs
Bad tenants
Extended vacancy periods
Decline in appreciation due to external factors (i.e. local market or neighborhood)
Property not appraised for value after scheduled repair (ARV)
Market slowdown or crash leading to a significant drop in ARVs
In short, risk is inherent in every investment, and no strategy or property is totally immune to potential losses. However, that doesn't mean you should go ahead blindly without understanding the risks involved.
Before making any investment, it's important to do your research and understand exactly what you're getting into. What are the potential risks? What could happen that could cause you to lose money?
By understanding the risks involved, you can make more informed decisions about how best to protect yourself. By being aware of potential dangers, you can prevent them from causing serious damage to your portfolio.
3 What can be done to minimize these risk factors?
When it comes to real estate investments, returns are never guaranteed. No matter how good your market research or how experienced an investor you are, there's always an element of risk.
However, that doesn't mean you have to accept whatever fate decides to throw your way. There are a number of steps you can take to mitigate the risks associated with your investment.
For example, bad tenants can cause a lot of damage to your property, default on rent payments and increase the cost of eviction.
However, there are some things you can do to try and attract better quality tenants. For example, you can invest in nicer properties in nicer neighborhoods, or have a pre-leasing survey carried out.
Although even the best properties can end up with a bad tenant, the chances of this happening are lower if you choose your properties carefully. Another way to attract good tenants is to provide them with good customer service.
This means listening to their needs and concerns, and providing them with the information and support they need to succeed as tenants.
By taking these steps, you can increase your chances of attracting quality tenants who will take good care of your property and pay their rent on time.
Apply the answers to your investment strategy
Investment strategies are like everything else in life - there's no single answer. The trick is to find the strategy that best suits your goals, risk tolerance and financial situation.
Property investment is a great way to earn money and provide stability for the future. However, it can be difficult to keep track of all the payments and paperwork associated with owning a rental property.
That's where our payment solution comes in. We can take care of all the payments for you, so you have more time to concentrate on your investments. After all, what's more important than the real money in your bank account?
Contact us today to find out more about how we can help you free up your time and improve your results. 💰
