Residential real estate is increasing in popularity as a form of long term investment. However most people have little knowledge as to the differences between a good investment and an ordinary investment. Here is a simple guide to help you.
This formula is not meant as investment advice. It is based on my personal experience and knowledge of property investing. The formula will work well in most first world countries. However all countries are different and so you should check this formula against trends in your country.
As a professional investor I will often buy outside of this formula but I also do extensive research and have many years of experience as a full time investor. This formula is aimed at the person who does not have the time, resources, experience or inclination to do the amount of work that a professional investor will do.
1. Buy in a Medium to Large City
It is a fact of the western world that cities are growing in size and population. When it comes to investing the trend is your friend and so it makes good sense to buy in areas where the demand for residential property is increasing.
2. Buy At or Below the Median Price for Both the City and the Suburb that you are Buying In.
High price properties are luxuries and as such tend to fluctuate substantially in price according to the economy. However median price and below properties are filling a basic need and therefore come more into the necessity category. This results in a more stable, lower risk, market for properties in this price range.
3. Get a Thorough Pre-Purchase Building Inspection Conducted by a Qualified, Experienced Professional.
You should know what the required maintenance cost is going to be for the property you are buying and factor that into the equation when you are determining what the property is worth. An unexpected problem with the building can be expensive and quickly erode your profit.
4. Find Out What is Planned for the Area that you are Buying In.
The laws of disclosure on this matter vary from country to country. At the end of the day it is best to assume responsibility for discovering if anything is planned that may adversely affect your property price. This could include things like a highway being rerouted through or next to the house, a factory, airport or other noise or pollution producing construction being planned for the neighborhood, and so on.
5. Spend At Least 3 Weekends Researching Property Prices in the Area.
Most people will be very good at judging the market price of a property once they have spent a few weekends looking at properties in that area and observing what they sold for. Make sure that you take the time to also attend auctions and watch the bidding patterns. If you can accurately judge market value then you are far more likely to buy well.
6. Make sure that you can afford to pay the loan and the running cost of the property even if you only have a tenant 50% of the time.
You would have to buy very badly or be asking too much rent to have your house empty 50% of the time. One possible exception could be in holiday housing that was very seasonal but this is usually balanced by very high income when the house is rented.
Having said that, it is still a wise precaution to ensure that you can afford to cash flow the property even in this extreme case. There is nothing worse than having to sell a good capital growth potential property simply because you were overly optimistic when assessing the cash flow potential.
7. Be Well Insured.
Property insurance is cheap and is good risk management. Make sure that you don’t underinsure because you will find that most insurance policies will only pay a proportion of the normal amount, even on small claims, if they can show that you are under insured.
If your cash flow ability is dependent on your income from a job or business, which will usually be the case if you have a mortgage, then you should also investigate income insurance. A loss of job due to illness or accident can cause you to lose the investment if you don’t have your income protected.
In some countries you can also insure against loss of rent from a bad tenant. However the cost and benefits of these policies vary greatly and it is up to you to ensure that you are getting value for money if you take on one of these policies.
These seven simple rules can provide a good basis for helping you make a good property investment without having to be an expert, professional investor.