For most people, buying real estate represents a major investment. In exchange for committing large sums of money, you should be able to receive an excellent return over time. On the other hand, if you make the wrong investment, you stand to lose a great deal of money. Here are eight tips to help your investment perform well.
1. Acquisition Cost
Are you buying this investment property at the right price? While good investment properties are rarely cheap, if you are unable to find comparable sales that support your price, you might be overpaying.
2. Availability of Financing
Can you get a reasonable loan on the property? If you cannot, ask yourself this question… If my lender does not want to make a loan on it, do I really want to own it?
3. Management Needs
Some real estate, like single family homes in highly desirable communities, is very easy to own. Others, like apartments in rougher parts of town, require a great deal of management. Does the property match your management abilities? If not, do you have a good third-party manager that can help you?
4. Potential Tenancy Issues
Are the building’s tenants stable? A full building with a great deal of tenant rollover in the next couple of years could very quickly become an empty building. If you do not have extensive experience with re-tenanting investment properties, seek out buildings with stable tenant rosters.
5. Physical Condition
Physical repairs do not always add significant value to commercial real estate. As such, if you do not have a clear strategy that involves doing rehab work, look for properties which are likely to remain in serviceable condition for as long as possible.
A poorly located property can be profitable at the right price. Even so, you should look carefully at a property’s location to see if it will cause trouble in retaining existing tenants or in finding in new tenants in the future. Be especially wary of changes to the area which could impact competition or limit access to the property.
7. Future Competition
The only retail center in a town is a great investment until three more retail centers get built. Survey the surrounding area to see the likelihood of new competition coming in. If construction is coming, ensure that there is enough demand to absorb the new buildings without harming yours.
8. Exit Strategy
Investment properties usually get sold some day. Does the building that you are considering have a clear way that you can make money when selling it? Exit strategy is an especially important concern with buildings that could lose tenants over time.
Given the significant cost of a piece of investment real estate, maximizing your investment potential while minimizing your risk is crucial. Following these tips is a great first step.