Forget what you know from HGTV. When it comes to investing in the housing market, things tend to look less like Property Brothers and more like you pulling the hair out of your head. The difference here is in expertise and resources that can help a buyer separate the money makers from the money pits.
Plan a Budget Before Looking.
When looking for a good property, it is important to maintain a critical eye. Don’t think with the heart, and most importantly, don’t let a real estate agent talk you out of your wits.
As with any financial decision, it’s better to handle property investments with a simple cost-benefit analysis. It’s Econ 101: the output of your investment should surpass what you input. So for example, if renovations on an existing property would require $30,000, then you should expect to recoup that investment and more—be it in property value, comfort, or happiness. This is especially important in the real estate world where the cost of renovations don’t often equal the value an appraiser might give it.
If this is your first time buying a home, make sure that you have a small financial cushion or emergency fund to fall back on if things don’t go as planned. Be careful. The general rule of thumb is to save enough money to cover up to 4 to 7 months of working expenses.
Know What to Look for First: Location.
The first and most important aspect of a real estate investment is location, as in “location, location, location.” You hear it everywhere for a reason. In fact, most real estate gambles are made on up-and-coming neighborhoods. The quickest way to turn a profit on your property is to purchase a home in a neighborhood that’s on the cusp of become super trendy.
Take a look at Brooklyn. In the past decade, Williamsburg has become one of the most desirable places to live in all of New York City, causing housing prices to climb and climb. Back in 2006, The New York Times found several options in the $1,000 a month range. Well, today that won’t even get you 1 ft2 of space if you are looking to buy in the neighborhood, according to the real estate website, StreetEasy.
On a smaller scale, this type of price surge can happen anywhere—in smaller cities like New Haven or close-by suburban areas like Woodbridge or Branford. To build a money maker, buying into these areas before they get hot is the best strategy for financial success.
Asking the Right Questions, Hearing No Lies.
When sellers get desperate, they can easily dress up a money pit with buzzwords about spacious ceilings, hardwood floors, and big windows. Sure, some sunlight would be nice, but isn’t it more important to find out if the septic tank needs replacement or if the boiler is working? What about the water pipes? Whether its new construction or something old, be sure to hit these critical questions before you sign anything.
Inspectors Are Worth It.
And on the topic of new construction, make sure you have it inspected. The biggest mistake an investor or buyer can make is to assume that something newly built is in perfect working order. Nothing is perfect. A home inspector is your last line of defense against a poor investment. For the cost of around $400, you may save yourself tens of thousands of dollars in fixes.
An important note here is to choose an inspector who is not aligned with your realtor’s agency. Although a quick solution, it may spur a conflict of interest. And when the inspector comes, make sure you are at the house yourself to make sure all the found mistakes are catalogued.
The Bottom Line.
Unfortunately, we just can’t assume that builders and contractors have made homes that pass the housing code. You have to ensure that yourself. The home-buying process can be stressful, true, but it can also be an empowering experience. Property Brother or not, knowing what to look for in a home gives you the ability to pick your options without the sway of agents or other vested interests. With enough skill, who knows? Maybe those investment decisions will become a money making business!
If you are thinking about investment properties, give me a call or text at 206=730-0962 or email at email@example.com
Eric Khan is a Senior Mortgage Banker licensed in 23 states. Eric has been in the mortgage industry for over 10 years, and can be contacted by phone at 203-783-4593 or by email at firstname.lastname@example.org. NMLS# 184348.