Insiders Secrets for Buying an Investment Property Series
Buying an investment property, especially if it’s your first time, can be complex and confusing. You want to make sure you don’t do something wrong. Or you might worry that you don’t know what you don’t know!
Even though each investor’s situation is unique, you’ll find the question/answer sections below might give you some insight on what steps might be best for you. Plus, you might also learn something “you didn’t know you didn’t know”.
How Do I Know the Property Value Will Increase?
Although there are no guarantees, there are clues and historical data that are indicative of future performance. If you know an area is changing in a way that will increase in density or desirability, you are likely to see an increase in value over time.
There is no denying the large role appreciation has played in real estate investing, but there’s also no denying the risk involved in relying on appreciation to make a profit. Instead, buy and hold investors should see appreciation as icing on the cake, a bonus that will assist in the investment but is not the basis of that investment.
Will prices continue to climb because of inflation, scarcity, and greed? No doubt. Appreciation will make millionaires out of many, but your deal analysis should never assume it. Treat appreciation for what it is: a possible reward for an investment done right.
Should I Put A Deadline On An Offer?
If you are going to put in a deadline, make sure to give one that allows for enough time for the seller to respond, but not long enough for another offer to swoop in. Often 8-12 working hours (not sleeping hours) is a good time period, possibly allowing you to avoid a bidding war.
But you’ll need to make it worth the seller’s while to take their home off the market quickly – perhaps offer your best upfront, consider waiving contingency periods, and the more cash you can bring to the table the better.
In some situations, a deadline may make the seller not want to respond at all, so make sure you’re prepared for that outcome as well.
Should I Wait For Interest Rates To Drop To Buy?
What should you do when interest rates increase to levels we aren’t used to seeing? Suddenly you’re seeing monthly mortgage payments are noticeably higher, which hits your cash flow returns. Does this mean it’s time to slow down on your investments? The best way to decide this is by understanding how rental properties make money.
One of the biggest things you should remember with rental properties is that they are, in fact, long-term investments. They see the most profit over the long haul.
Rental properties make money in five ways; cash flow, appreciation, tax benefits, equity built via mortgage paydown, and hedging against inflation. When you understand each of these profit areas, you will not only have a better understanding of the why you should hold a rental property for the long-term, but you’ll also begin to realize that the expense of an interest rate a couple points higher than normal likely doesn’t hold a candle to the profit potential over the lifetime of the rental property.
What About A Recession?
Many foresee a recession on the horizon- while others will say it’s already here. Despite the dark forecasts we are hearing everyday, every cloud has a silver lining – and a recession is no different.
There are numerous ways to make a recession work for you. Leveraging your equity is one of them. Taking out a lower rate home equity loan will allow you to dump that money back into properties whose prices are dropping.
When the market plummets, properties can be yours for pennies on the dollar. Once the market recovers (which it historically has always done), you not only have a good cashing-flowing property, but the value is “back to normal”.
You’ll then watch for lower interest rates. Markets are dictated by simple supply and demand. So when the economy tanks and banks need to lend you money to make themselves money; interest rates go down. This offers great opportunities for both savvy and rookie investors alike, lowering your cost of capital.
We have heard your questions before, and even if we haven’t, no question is ever a “dumb question,” so reach out and ask!
Next up in our Insiders Secrets for Buying an Investment Property series is – Choosing Your Niche & Strategy. There are dozens of ways to make money as a real estate investor. Identifying your niche will allow you to narrow your focus and execute a plan of action!
Parker Properties, Inc.
With a background in property management, I know which homes make the best investments and excel at managing those properties for you after we close. My meticulous eye and high standards are applied to every aspect of caring for your home & your investment.
PO Box 1273
Kamas, Utah 84036