One of the interesting things about real estate is that there is a fixed amount of it in the world. This fact, combined with a wide variety of home improvement television shows, have many convinced buying a property as an investment is a smart move. Is it? We spoke with several investment property professionals and found that it can be a good investment if buyers do their homework. That starts by asking the right questions. Based on our interviews, these are the top five questions (with answers!) that buyers are asking the pros.
1. What kind of property should I buy?
This is not just a question buyers are asking, but lenders ask as well. Phil Purcell, vice president of commercial lending at Hanscom Federal Credit Union, asks first-time buyers about their experience owning a single-family, two-family, three-family, or even a commercial building.
He shared, “We partner with buyers and ask them to think about themselves first. For example, can they knock on doors and collect rents?” Potential buyers should start by considering if they have the time and interest in the post-sale responsibilities of owning an investment property.
2. Can I make money here?
Ultimately real estate as an investment vehicle comes down to money. This is where buyers need to be pragmatic and analyze properties.
Nick Spagnola, manager of City Realty Group, said, “When working with buyers of investment properties, it is important to gather as much information about the property as possible. This includes gross monthly rent amounts, taxes, insurance, and any other expenses associated with managing the property. Listing agents should provide all potential buyers with a clear picture of what the net income will be on a property to help potential buyers make decisions quickly and thoroughly.”
“Buyers should ask to see the seller’s IRS Schedule E (Supplemental Income and Loss – from rental real estate, royalties, partnerships, S corporations, estates, trusts, REMICs, etc.),” said Purcell. “This lays out what the sellers are reporting to the IRS and it may be the most accurate information available.”
Buyers should put together their own estimates of running a property, including income, vacancy, and non-performance (non-payment), as well as utilities, maintenance and repairs, landscaping, insurance, and other expenses. “We have a template buyers can use to put together an estimated budget,” Purcell said. “We try to partner with people on these purchases upfront.”
3. Are the utilities separated?
This is a consideration for an investment of multiple units, whether commercial or residential. “Separate utilities shift the cost of electricity, heat, and hot water from the property owner to the tenants. How much heat, electricity, and hot water renters use varies from unit to unit. If a landlord is covering the cost of all utilities, there is no incentive for the renter to conserve since they do not have to pay the cost. They will generally use more utilities giving the property owner less profitability,” cautioned Spagnola.
4. Is the property de-leaded?
This is a consideration for residential properties. In Massachusetts, the Lead Law requires the removal or covering of lead paint hazards in homes built before 1978 where any children under age six live. Lead paint hazards include loose lead paint and lead paint on windows and other surfaces accessible to children. Owners are responsible for complying with the law and cannot refuse rental to families with children under six. Buyers can check to see if a property has ever had lead violations or if the property has been de-leaded at Mass.gov.
5. What are the rent trends in the area and is anything going to be changing in the near future?
Buyers need to do their due diligence on markets. Your realtor can give information on market rents in an area and a buyer can do research on sites like Craigslist or HotPads.com. As with any property, buyers should check for school quality, crime statistics, and economic development efforts to determine if a property is one to acquire or not.
When buying an investment property, experts agree that buyers should understand the numbers dispassionately and not “fall in love with the brick.”
If you're interested in purchasing and financing an investment property, we encourage you to download our free eBook Investment Property Ownership. It covers topics including:
- Figuring out if buying investment property is right for you
- What to consider before you buy
- The keys to real estate investment success
- Finding the right broker
- Finding the right property
- How to secure your financing
For questions about financing an investment property, contact Phil Purcell, Hanscom Federal Credit Union's vice president of commercial lending at firstname.lastname@example.org.
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