Seasoned property investors know that they need to make multiple checks before they buy any property. These reduce their risks and ensure that they get the biggest return possible.
But if you’re inexperienced in this industry, it can sometimes be hard to know what to do. If you’re buying your first property, you don’t know what precautions you need to take ahead of time. That’s where this guide can help. We look at what you should be doing before committing to any property.
Generally, buying a property is safe if you are a resident in your country, but there are some risks that you need to be aware of.
Market analysis
One of the first things that professional property investors do is conduct a full market analysis. They want to know whether it is possible for them to get returns long-term if they invest in a particular market. Some areas can experience big decreases in property prices if something goes wrong – for example, crime statistics rise even as surrounding areas increase in value. Property investors make sure that this doesn’t happen by looking at all of the metrics that matter, for example, they might explore things like:
- Drop trends
- Population growth
- School ratings
- Police information
- Infrastructure plans
- Comparable rental yields
Once they have all of this information to hand, they can then put it into a model to determine whether house prices will rise. Usually, prices behave predictively in accordance with specific models. Once the correlations are known and the strength of the effects, it is just a matter of crunching the numbers and working out how much prices are likely to rise in the future. Sometimes the data will indicate that prices may fall, which is a sign that you shouldn’t be getting into the market. If you don’t know how to do this analysis yourself, then feel free to use software.
Financial diligence
Another thing a lot of pro-real estate investors do, which you should copy, is perform financial diligence. They run through the historical financials of all of the properties they look at, including the income statements, rentals, void periods, and taxes. You’ll want to do this with any property you’re looking to buy, especially if it’s for investment.
Check how much current rents are worth and whether tenants are paying on time. You need to look for vacancies and if you have to fulfill any additional terms as part of your lease. Be aware that some landlords can get into trouble when they take on too much risk related to a property. Often, the more they try to attract tenants, the more they end up spending their own time and money. You need to be aware of this and whether any pre-existing terms exist.
Physical property inspection
Professional investors also never skip physical property inspections. They start with the essentials like the foundation, structural integrity, and the roof age. Then they move on to additional elements like the plumbing and electrical circuits.
It’s important to look out for damage on rental properties because it can be an indication of deferred maintenance. You may also find issues like water damage, mold, and pests in the extremities of the home like the attic and the basement. These issues can be challenging to deal with. Investors are also wary of code violations. Rental properties need to meet specific standards, but if existing owners aren’t ensuring this, it can lead to losses in the long term.
Checking the appeal for renters also matters. This is something that a lot of new property owners and managers forget to do. For example, they failed to check things like the layout, which matters to a lot of individuals who rent properties. It also matters in terms of the amenities that are available. Can renters get everything they need nearby?
Legal title review
Finally, many pros perform a legal title review. The idea here is to check that the title is clean and doesn’t have any encumbrances or liens against it.
Title insurance is also a commitment. This provides additional protection.
Finally, professionals go over any additional rules that might apply. For example, they look at homeowner organization ordinances if they apply. They’ll also review leases and look at environmental or litigation issues that might be underway on the property.
Sometimes modifications and renovations aren’t permitted. The original owner didn’t get permission, but the responsibility can pass on to you. That’s why professionals always confirm that the planning process was followed in the proper way.
Photo by Florian Schmid on Unsplash
