Four Essentials to Look for in An Investment Property
If buying an investment property is something that's been on your mind, now might be a good time to start thinking about it more seriously. With prices and interest rates down, it's a lot easier to do now than it was even just a few months ago — and it may be potentially easier than it will be at a later date, should the market stabilize, prices shoot back up, or interest rates increase.
If you're considering an investment or rental property, here are four things to look for:
When looking for a potential property you plan to rent out, look locally. I recommend this because if you’re just getting started investing and renting, it’s easier to get a handle on the neighborhood and the rental market if it’s in an area you know well. Plus, it’s nice when it’s a short drive to pop over there, whether you’re meeting potential renters, are doing work on the property, or run into an issue (which, trust me, always happens when you least expect it.)
The exception would be if you’re purchasing a vacation home, like a cabin in the mountains, wine country, or by the beach. This would be something where you might rent it out half the year and use it personally the rest of the time, and it ends up paying for itself. In that case, I would recommend working with a property management company to handle the day to day things that come up.
Easy to Rent
Look for a property that’s in a good area with high demand. Consider things like local companies in the area, college or university campuses, and proximity to downtown and commutes. Factors other than location that make a property desirable are things like: age and architecture of the building, whether it’s updated and clean, whether it’s single family or multi-unit, having yard space, the noise level of the neighborhood, etc.
There's nothing worse than having a vacancy, especially one that last for weeks or months. A property that's desirable and in a good area should always lease quickly.
Potential for Growth
When you’re looking for real estate, it’s easy to get caught up in the new homes that have just been remodeled or completed. But when looking for an investment property, it can pay off to find something that’s in need of a little (or a lot of) TLC or has room to add another living space. While you pay a premium for shiny, new spaces, it’s still possible to find a good deal on properties that need some work.
A property with the ability to expand, add one or more additional units, or improve in general is key to generating more value and growing your portfolio.
The Numbers Have to Work
Ideally, when you’re investing, you want to put as little cash as possible into the property and have some positive cash flow. So you would want to calculate how much you need to put down, what the monthly mortgage payment would be, and research what you would be able to charge for rent.
In recent years it's been challenging to pull this off locally. In some cases, you may find an investment where initially you would break even or have a negative cash flow, but there’s clearly potential to improve the property and get a better return.
Natalie and I bought our first investment property in 2013. This one worked out well for us because we immediately had positive cash flow and there was also potential to improve and resell for a profit. Here's a short tour from when we first purchased the house in 2013 for $345,000:
We ended up leasing it for about a year, then remodeling it and selling, rolling it into a larger investment property and have bought and sold several other properties locally since. Here are photos from after it was remodeled and sold in 2014 for $520,000.
As always, if you're reading this and want to buy an investment property in or around RWC and are not sure where to start, or have questions, feel free to send me a note or let's grab coffee and chat.
Cliff Whearley has been a resident of Redwood City for 23 years and was named Realtor of the Year in 2018 and 2016 at Dwell Realtors, Inc. If you have any real estate questions, he would love to help!