Real estate can be a nice investment for your money. It can also be risky. No risk – no reward though, so if you want to invest in property to ‘flip’ it, or generate income, or hold for a long-term investment that will hopefully improve in value, here are some considerations.
#1: location, location, location!
You might be able to pick up some real ‘bargains’ if the property is not in the very best neighborhood, or if it sits next to the city landfill or in a floodplain. Look at these factors and decide whether any of them might change for the better, and does that fit within your timeframe threshold – how long do you want to hold the property and what are the economic trends in the area; doing a little research and getting a good feel for where things are going is worth it.
Does the property have great bones, curb-appeal, potential? It’s always a good idea to have a professional inspection done – this is a popular contingency on offers. In PA ‘time is of the essence’ and you have a fixed deadline in order to do any due diligence/inspections; you must gather your reports and findings and respond before that drop-dead date hits, once it passes if you have not responded that you want to terminate or negotiate – you then forfeit your inspections contingency.
Investment property funding can be a little more tricky than lining up a mortgage for your primary residence. An FHA loan IS possible, if you will be living in the property (4 units or less) as your primary residence – you can even count some of the rental income towards your own mortgage $ qualification here, but there are many rules about % of the property you live in vs. tenants.
There are also some nice renovation loans out there – many local banks have these in their portfolio or if you go with an FHA version, there is the 203k loan. Not all lenders will do these but if you are not afraid of a lot of paperwork, documentation and phases of construction being approved this is a very nice way to go for properties that need significant work/updating done. There are some of these loans available to investors that will not be living in the property as their primary residence, at higher interest rates.
Commercial loans for 5 units & more typically are 15-20-year mortgages or less, and often with variable interest rates. Here are a few local lenders that have good experience and advice on financing various investment properties. Once you have decided that you are ready to be a landlord or want to invest in property it’s a good idea to strike up a no-obligation conversation with a lender or two and explore your financing options.
4: CAP rate
The CAP (capitalization) rate is an excellent test for any income-producing properties – in your evaluation you need to ensure that you are getting a decent return on your investment. Very basically, this is the net income / the price of the property. So – lets say a property brings in $30,000 net income and it is priced at $333,000. this property generates approx. 9% CAP rate which is good for this area; a nice investment assuming that the property doesn’t require enormous renovations.
We can help you analyze whether some investment properties make more sense than others, for your needs.
5: Zoning / use
If you are considering a ‘mixed use’ property such as one with a first floor commercial and upstairs rental units, you should make sure that the business you want to open there (or that your tenant wants to open) will be an allowed use… or – if it’s a ‘new use’ you may need to go through a variance process.