4 Tips For Evaluating The Potential Of An Investment Property

The goal of obtaining an investment property is to turn a profit. If you can't see the possibility of profit, then it's not a good investment. It's a basic premise that most people understand. Yet, many people still give up their money or take out loans on poor investments. Here's how you can avoid doing that.

1. Put Your Personal Feelings to the Side

There's nothing wrong with having a personal attraction to a property. You can certainly look for properties that please you for personal reasons. However, your personal feelings should come secondary to the investment potential. The investment potential represents the bigger picture. Always keep that in mind when you're looking at potential real estate investments.

2. Try to Figure Out Why the Property is for Sale

You may come across an investment property that's reporting high yields and seems to be doing just fine. But, if that's the case, why would someone sell it? It's always possible the seller has their own reasons for selling. It's also possible there's some issue involved that can force the seller's hand.

You don't want to inherit any unanticipated problems with your investment property. Ask questions and look to see if you spot potential impediments to the property continuing to make those good returns.

Potential Issues to Look Out For

For example, look at recent trends, such as people starting to move away from the area. What about the property values in the area? Are they on a noticeable decline? Of course, you'll want to check the property itself with a thorough and professional inspection.

Keep your eye open for anything that can turn your investment property into a liability or a failure in the future. Even if you go through with the investment, you'll know what you're really dealing with.

3. Work the Numbers to See If It's Worth It

The numbers can really slow you down on making your decision, but they're necessary. If you need to make a decision quickly, you can always go with the 1% rule.

This rule states it's likely a good investment if the monthly rent received equal at least 1% of the purchase price. The purchase price includes any repairs and other payments you have to make for the property as well, not just the sales price.

For example, a $250,000 property should rent for around $2,500. If it falls too short of 1% then you may want to move on. If it meets or exceeds 1%, then you should give the property further consideration.

Understand the 1% rule is quick and dirty, and you should only use it for initial evaluation. After that, you'll have to dig deeper into things like:

  • How much you can put down
  • Your potential loan payments
  • The current price-to-rent ratio
  • Gross and net rental yields

You want to know that you can cover the investment and turn a profit. So work the numbers, then work them again.

4. Understand There's No Magic Formula

No matter what, it's not possible to predict precisely how any investment will play out. Investments come with risk. That's why it's important to fully evaluate any investment property thoroughly.

The more thorough you are the better chance you will have when it's time to look for investment real estate loans. Lenders will want to know you did your homework, and that you have a concrete plan for the property.