The 10 Step Checklist For Buying an Investment Property

Investment Property Checklist

Investment properties are fast becoming the most popular form of investment, with purchases rising over 25% in the last 5 years. It makes sense, since more savvy investors are looking to diversify their holdings to ride out the increasing financial swings. Maybe you’ve decided it’s time for you to join this group of savvy investors and buy an investment property of your own, but you’re not sure where to start., This 10 step checklist will help you make the right decision.

What Is an Investment Property?

An investment property is a house, condo, commercial site etc. purchased for the purpose of generating income. Since you don’t normally live in your investment, it’s neither your current primary residence nor a vacation home for tax purposes. If you’re an investment property owner, you’re potentially a landlord – managing or overseeing the rental of the property to a tenant who pays you to live there. If it’s not purchased for renting, it might be your intention to renovate and resell for profit. Investment properties can provide flexibility and variations for profit potential, including:

  • Double The Profit Potential: An investment property offers two main ways for you to achieve financial gain: rent that can provide on-going income; and appreciation in capital value that can result in a profit when the property is sold. There may also be tax advantages available, depending on your financial profile. (Make sure you consult a tax professional for advice.)
  • Potentially Little Or No Money Down: Depending on your lender, it’s possible to become a property investor with a relatively small amount of out-of-pocket money. Among your financing options you may find loans requiring little or no money down. There are even options that let you use the equity from your current home to purchase your investment property.

Becoming a property investor is a big decision to make, and it will require diligence, commitment, and an understanding that, for the most part, it’s a long haul. To get you up to speed, read the checklist below.

The 10 Step Checklist

1. Assess Your Financial Goals

Before you dive in and buy an investment property it’s important to assess where you want your financial future to head. Investing in property can be a powerful wealth-building tool, but it can also be a burden if not done right.

The first and most critical step is to be in control of your finances and have an overall plan for your financial future. Once you’ve got that, then you can accurately assess if investing in property is a good strategy for you. If you’re new to financial planning it may be worth talking to a real estate attorney and accountant, and cultivating relationships with these advisors. If you choose wisely they’ll be a valuable resource throughout your investing career.

To start off, try asking yourself:

  • What investments do I currently have, and what do I want to acquire in the future?
  • Do I have retirement savings?
  • Will liquidity be an issue for me? Do I need fast access to cash?
  • Will I be able to be in this long-term, and be comfortable with an unpredictable cash flow?
  • Do I expect my investment property to supplement my retirement?
  • Do I expect the property to provide income, or do I want long-term capital gains?

2. Assess Your Personal Goals

Owning and maintaining an investment property is a large commitment to undertake, and it’s a decision that needs to work with your personal goals and ideals for your future. There are many professionals, such as life coaches and counsellors, that can help you figure out what your ideal lifestyle might look like, but try asking yourself the following as a start:

  • Where do you want to be in 2, 5, 10 years?
  • Where is your ideal location to live?
  • Do you want to start a family?
  • Do you want to travel? Do you want to have a solid base for a family?
  • Are you satisfied with your career(s), or do you see a big change in the future?
  • Are you comfortable with the idea of commitment and the responsibility of maintaining another asset?

3. Ask Yourself: Are You Landlord Material?

Owning an investment property may require you to play an active role in management of your tenants. Consider the possibility that you may have 3 a.m. emergency phone calls to answer, late rent to collect, evictions to process, paperwork to keep up with, repairs and maintenance and additional tax paperwork to be done come tax time. Investment property is a major commitment and you need to be fully aware of the responsibilities and obligations you’ll need to abide by. Remember, there are always professionals that you can hire to give you a helping hand – for a price.

4. Consider a Management Company

If you’re planning to manage your investment property from afar, or you predict that you’ll be too busy to handle the extra work your investment will inevitably involve, then a property manager may be a good solution for you. Acting as a third-party, a property manager will run your investment like a business, collecting rent, doing the bookkeeping, coordinating repairs and dealing with the inconvenient 3 a.m. phone calls. A good property manager will cost in the range of 5% to 10% of your gross rental income; more if additional services are required. You’ll need to weigh up the cost vs. the potential stress-free operation of your investment – which could make the additional price a bargain.

5. Determine Your Borrowing Capacity

You’ve decided to take the leap and join savvy investors in the purchase of your first (or second, or even third) investment property, so unless you’ve got significant cash in the bank it’s time to head on down and see what sort of investment you’re able to afford. Financial institutions have stringent criteria for issuing loans, especially after the financial crisis of 2008, so it’s wise to check just what you can borrow before making a spontaneous offer to a property agent.

6. Choosing The Right Location

Once you’ve got your finances approved, it’s time to choose a location that is both affordable and a smart investment choice. Although you can buy virtually anywhere, you need to consider whether you’re comfortable being an absentee landlord – managing a property thousands of miles away – or if staying local to keep a watchful eye is more your style. Once you’ve determined that, some location-dependent factors to consider before making an offer might be:

  • Services: What services are close by that may increase the desirability of your property for renters or future buyers? Health, shopping, employment etc.
  • Schools: Many renters and buyers look for the availability of schooling for their future family. What does your potential investment offer in terms of schooling?
  • Transport: Access to transport is becoming more of a consideration. Is parking available? Are there busses or trains close-by? How easy is it to get to an airport? Is the airport domestic or international?
  • Desirability: How desirable is the location? Are the streets lined with trees? Are the yards well kept? Is it a newer or older neighborhood? Is it busy, or peaceful?

7. Choose Your Property Wisely

If you’re going into property investing remember that your main reason for buying is to make money. Keep that goal in mind at all times and give yourself every advantage to achieve this goal. You should also take the following into account:

  • Stay clear of areas where property prices are at their peak. Generally, these offer a lower rate of return. Instead try to find a property in an up-and-coming area. A property agent will likely be able to help you out.
  • Focus on your main investment variables: the purchase price, rental income, and potential profit. Don’t make the mistake of getting emotionally involved in the deal. You won’t be living in the home, so forget the room layouts or carpet color.
  • Look into distressed properties that have been returned to lenders (banks and mortgage companies) after foreclosures. There are great deals to be had here.
  • Determine how much you can get for rent on a potential property. As a start check out the U.S. Department of Housing and Urban Development Web site. They offer fair Market Rental Rate statistics that break down average rentals for metropolitan areas across the United States. Alternatively, look at the “For Rent” section of local newspapers and property magazines in the area of your proposed investment. You’ll be able to get a general idea of market conditions there.

8. Secure Your Finance

Securing your finance will enable your investment dreams to come to fruition, and unless you’re in the banking industry, you’re best off finding an experienced mortgage consultant to become a valuable part of your team. Home mortgage consultants are trained to ask questions that uncover a clear understanding of your investment goals, which they can use to make recommendations for your wealth building potential. Here are just a few of the solutions that may be available to you:

  • Home Equity Financing: Allows you to leverage the equity in your primary residence to purchase an investment property. You may be able to borrow up to 100% of your current home’s unused equity.
  • Renovation Financing: A single loan that covers both the purchase price of an unrenovated property plus the costs of renovation. The loan amount is based on the estimated value of the property after your improvements.
  • Low Down Payment/No Down Payment: Allow you to purchase a property with little cash out of pocket.
  • No Doc/Limited Doc: Lending options for the self-employed.

9. Make An Offer

Once you’ve found a place and received the “green light” from your lender, it’s time to cement your commitment to an investment property and make an offer. It’s advised you consult a property agent, and even employ their expert services to do the negotiation on your behalf. Negotiating a deal for investment property is an art, and unless you’ve got the background knowledge of the market, then you could be sabotaging the value of your investment. Sometimes it’s worth paying a fee to get a better price.

10. Get Your Investment Checked Over

If your offer gets accepted be sure to include a clause in the contract to have the sale conditional on the property passing a building inspection. All too often property condition is assessed at face value – what’s on the walls, and what looks good to the naked eye. In the greater scheme of property investing, it’s what’s behind the walls that counts. Are there termites? Is there rotting of the frame? Are the foundations structurally secure? These are all answers that need to be answered by a qualified professional.

Signed, Sealed, and Delivered

Making the move to property investing is a significant decision to make, and one that will inevitably bring changes to your personal and financial future. It’s up to you to perform the due-diligence and ensure that this change is a positive one, and complements the vision for your future. Using this 10 step checklist will ensure that you’ve got all your boxes ticked when buying an investment property, and may even prevent you from making irreversible decisions that you could regret in future.



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