The investment in real estate is an excellent opportunity to create the long-term wealth. This is the reason that I’ve done it quite a long time! However, investing in a property also is not without risk. So, novice and experienced investors alike must be sure to ask the right questions before purchasing the property.
Personally, prior to purchasing a home, I like to divide my questions into 4 categories. I ask) myself,) an agent for real estate three) the seller and four) an inspector, or the GC. By analyzing the answers to these questions, I am able to decide if the deal is right for me.
In the remaining portion of this article, I’ll go over the main questions that arise in each of these categories. In particular, I’ll discuss the following subjects:
- The Benefits to Buying Investment Properties
- The Importance of Due Diligence
- Category 1: Questions to Ask Yourself
- Category 2: Questions to Ask a Real Estate Agent
- Category 3: Questions to Ask a Seller
- Category 4: Questions to Ask the Home Inspector or General Contractor
- Final Thoughts
THE BENEFITS TO BUYING INVESTMENT PROPERTIES
Before diving deep into the nuts and bolts of the various real estate purchase issues I’d like to present a comprehensive overview of various avenues to profit from real estate. If investors are aware of the ways in which real estate generates wealth, they get greater understanding of the potential value of real estate. As for the potential value of real estate, knowing the wealth-building opportunities should prompt anyone who is new to investing and ask themselves: am I doing it right?
Also, investing in real estate can come with huge implications. Be smart when investing with the right strategies, and you’ll be able to make a huge amount of money. However, if you make the wrong choices and you’ll find yourself into significant legal and financial trouble within the flash of an eye. In that regard here are the main ways in which making investments in property can help build wealth:
Property Investment Profit Paths
Valuable-add value
when investors, specifically those that are following an fix-and-flip strategy and renovate a home and add value to the property. Through repairing the roof, painting an exterior, renovating kitchens or making any of a myriad of enhancements, they boost the value of their home. If they do it correctly the value boost because of an improvement is likely to exceed the expense of the work the improvement. Investors who sell a home within a short time after renovations have been completed are aware of the value that will be gained from the sale.
The cash flowing from rental
If you have an analysis of the deal properly the investors will earn extra money from rental properties each month. Based on the priorities you set for building wealth You can make use of this cash flow in multiple ways. For instance, if you want to expand your rental property portfolio you can put this money aside each month until you have enough to pay for an additional down payment. Or, you could decide for diversification in your saving portfolio and put this money into investing in bonds, stocks, or mutual funds.
Amortization of loans
When tenants of investment properties pay rent, the money will be used to pay your mortgage. When you take out an amortizing loan, such as mortgages, a percentage of every payment is deducted from the balance of your loan. As your loan balance declines the equity or ownership in the property grows and your wealth grows.
Appreciation of property
The above chart illustrates the property owners also benefit from long-term appreciation. While the value of homes can fluctuate over the course of a short period however, if you own for a long time it is likely that you will benefit from appreciation of property or the value of your property increasing. When the value of your investment properties grow and your net worth grows along with them. This is in direct relation to an old saying that applies to investment in property: don’t wait to purchase real estate, purchase real estate and then sit back and wait.
After I’ve laid out these profitable avenues and strategies, I’ll now turn to the main topic of this article due diligence and the types of questions investors must be asking when purchasing real property.
THE IMPORTANCE OF DUE DILIGENCE
In general due diligence refers to analyzing the background and the condition of a home. Particularly, investors would like to be aware about the physical condition of a house as well as its financial concerns (e.g. tax debts that are not paid) and the geographical location (e.g. the condition or the market local to it).
Also, think about due diligence in terms of “doing your homework” before purchasing a house. Would you purchase a vehicle without having it tested for driving experience and looking into its accident record? Absolutely no. It isn’t wise to consider thinking about purchasing a home as a major purchase than a car without conducting thorough study of the property. If you don’t conduct the necessary research prior to purchasing an investment property, what appears to be a great deal could turn into an absolute nightmare in a matter of minutes.
As an example, suppose the seller has completed some DIY improvements. If you fail to verify that these repairs are in line with the code then you’ll be accountable for repairing any code violations prior to selling the property, which could cost the seller tens or even thousands, and changing a profitable transaction into an expense.
However, investors shouldn’t look at due diligence in the context of the property. Instead, smart investors look at due diligence in the context of the entire set of questions they must ask. Particularly, I recommend dissecting due diligence in four distinct types of questions: those you ask) yourself,) your real estate agent and third) selling agent, and finally 4) your home inspection.
When you ask the questions below to these four individuals you’ll get a clear response to the most crucial issue: should I buy this property?
CATEGORY 1: QUESTIONS TO ASK YOURSELF
How much investment risk am I willing to accept?
Each investment in real estate comes with certain risks. And, as with any other investments the risk associated with real estate typically is directly related to the return. The more you risk, or the greater risk you take and the higher the potential for reward when you make an investment. For instance commercial real development from scratch provides some of the highest returns available in the market. However, transforming an undeveloped property from a mere patch of dirt into a stabilized commercial property is not without risks as well.
However it is possible to reduce the risk (not completely eliminate) when you purchase an fully-loaded rental house. These deals let you can purchase a property that is ready for occupancy usually at retail and a management firm handles every aspect of the transaction (placing tenants, managing the property, maintaining it etc.). However, this method also substantially reduces the amount you earn, due to the retail cost and the monthly management costs.
In order to understand this risk-reward continuum, investors must ask themselves what risk they’re willing to take prior to buying any property.
What real estate investing strategy do I want to pursue?
Real investment strategies are directly linked to risk. In the above paragraph, certain strategies are more risky than others (and in theory they also have a higher reward). While it’s not a comprehensive list Here is a list of three most well-known investing strategies used by real estate investors in the residential sector:
Fix and flip
This method the investors purchase distressed properties that require substantial repairs – usually at a substantial discount. Due to the level of depreciation, these homes typically do not qualify for the conventional financing the typical homebuyer will utilize. In this case, the home flipper transforms the property to make it can be eligible for conventional mortgages, then sells the property to a homeowner who is looking to buy a primary home and earns profits from the difference between the total cost and the price at which it is sold.
BRRR
It is a reference to rent, buy, rehab and refinance. Similar to flippers who flip houses, BRRR investors buy and renovate distressed properties. However, instead of selling the properties after rehab, they lease the homes they have renovated for a long time to tenants. Once they’ve found tenants, the landlord refinances the high-interest, short-term hard money loan that was used for the acquisition and renovation into a longer-term, low-interest, permanent mortgage. Following this refinance, BRRR properties function like the other rental properties that are long-term.
The turnkey purchase and hold
Investors using this method try to reduce maintenance and rehab work. Instead of purchasing an unrenovated property in order to make it more attractive the property, they invest in move-in-ready houses – usually at a retail prices. This means that these investors make less money, however this method also takes less effort.
While fix and flip and BRRR targets look like they’re similar the turnkey properties are move-in-ready. This is why it is crucial to establish your investment strategy prior to buying a home.
How do I want to finance a home purchase?
A phrase is used in the real estate industry: financing is king. The best deal you can get isn’t worth it if you are unable to find a way to finance it. So, prior to buying any property, it is important to determine how you’re planning be able to be able to pay for the property. A lot of residential real estate investors utilize cash-based loans because of the A) speed and B) easy approval. However, other options include placing your own money in a transaction, calling on business partners as well as borrowing from family or any other options for financing. No matter how you plan to finance a purchase, you must address this issue prior to you decide to purchase the property. In the event that you do not, you could miss the opportunity when your financial plan fails.
How much day-to-day involvement do I want to have with the property?
In a certain way this issue is related to the investment plan you have. For instance, let’s say you are looking to do fixing and flip deals or a the BRRR option. If yes, someone will be in charge of the day-to-day construction work. Do you have that responsibility or is there a general contractor whom you are confident in? Similar to BRRR deals, do you be managing the tenants yourself or hire an agency to manage the property?
It isn’t possible to find “right” answers to these questions. Investors should think about the level of involvement prior to buying a home, since it will help you establish the necessary professional connections.
It is important to note that as the rule of thumb the time commitment and the profit are inextricably linked. The more effort and time you commit to a task to earn a profit, the higher the amount you’ll make. However, by paying others individuals (e.g. property managers and contractors) to do the work on your behalf, you’ll reduce time, but these costs can also reduce your profit. The solution to the question boils down to your personal situation and your investment goals.
CATEGORY 2: QUESTIONS TO ASK A REAL ESTATE AGENT
Do you have experience working with investors, and do you have a plan for off-market strategies?
It’s the initial question that I pose to any potential real estate property agent. If they’re not experienced in working with investors, and know what investors look for in a property , why should they use them? I could pull my own information from MLS (or an aggregator of data, such as the one we use, “Investor’s Edge”).
Typically, I prefer to collaborate with an agent that also invests in the side, since this implies that he or she probably has a clear knowledge of the type of property I’d like to purchase. In addition, and directly connected to this, investors typically do not find deals that are profitable through the MLS. Instead, we search for off-market property with lower competition and higher prices. Any investment-friendly agent that is worthy of their reputation will have a clearly defined and actionable plan to go after off-market properties for you.
Are there any municipal zoning restrictions?
Some cities severely limit home renovations that alter the layout of a property. Before you sign a contract it is important to know the restrictions that apply to you in the local zoning regulations.
The homeowner might not be able to answer this question. However an agent who is a real estate professional particularly one who is familiar with working with investors – will definitely know where to find the information.
Are there any tax liens on the house?
Like title issues, tax liens are when the other party has a claim to a property . In this instance, it’s that’s the government of your local area. While this might not be an issue, you’ll need to be aware about the tax lien in question and include them in your transaction analysis prior to purchasing an investment property.
Again, you could or should talk to the owner about this. If someone is trying to sell an asset, he/she could not be transparent about possible issues. Instead an agent from the real estate industry will be able to guide through all the records available to verify that no liens are in place for a particular property.
What school district is the house in, and how is it rated?
This could make a significant impact on potential buyers as well as renters. It is certain to influence pricing of both fix and flip as well as strategies for BRRR. Real estate agents are bound by specific non-discrimination laws about what they are allowed to and cannot say about the value of a local region. However they also possess a thorough understanding of the local market and can likely give an honest and accurate answer that the buyer.
What is the current tax-assessed value, and what is the local property tax rate?
This is especially relevant for investors in BRRR. Taxes on property are a significant operating cost for rental property, which is why it is essential to understand the exact amount to forecast the future cash flow.
You don’t have to inquire with an agent for to provide this information. Tax information is available to the public and just a few minutes of searching in the online database of a municipality will reveal the tax records for a specific property. For those who are who aren’t familiar with this procedure it is helpful to have a knowledgeable real estate agent assist you in the procedure.
CATEGORY 3: QUESTIONS TO ASK WHEN BUYING A PROPERTY
Is there anything special about the home I should know about?
Certain homes have that “something” that makes them more attractive to prospective buyers. It could be the proximity to a fantastic playground or a nifty carpentry that truly highlights the unique features of the fireplace in the living room. The bottom line is that some houses have unique features which may not stand out to the casual viewer. Homeowners who live there can explain these small perks to you.
Why are you selling the home?
This will give you two important facts. In the first instance, if it relates to the property’s condition You’ll get a deeper understanding of the needs for repair that the property requires. In the second, if you understand the motivation behind selling someone’s home and why they’re selling, you can improve your offer for purchase. As real property investors, we’re problem solvers. Helping homeowners to solve their issue is a win-win situation and help the homeowner get money and discover a bargain.
How long have you owned the home?
Typically (though infrequently) the longer a person has lived in a home and the longer they have owned it, the more equity or she will have in the property. If people are able to earn equity from an investment property, they generally have a greater incentive to sell the property, since they are able to convert the capital into money. However, it may be more difficult to find motivated sellers among homeowners who have only a small amount of equity.
How long have you been trying to get rid of the house?
This is the basis for the approach you take to negotiations. If the homeowner has tried to market his home for more than a year and a half, they is likely to settle for lower offers or even more concessions. A homeowner who has listed their property just in the last week is likely more willing to wait and try on the market for bit.
When do you need to move/sell?
This information will help you decide your negotiation strategy. If a homeowner has to sell or move by a specific date, he may be willing to take an offer that is lower to meet the deadline. Furthermore, investors have an advantage in speed. When we use cash or hard-money loans, we are able to finish closing on homes quicker than those using the traditional method of financing. This is a great advantage for leverage in negotiations, and.
When is the earliest you can move?
This article will provide you with more certainty on the motivations of sellers or lack of motivation. If a seller responds by saying something like “I’ll give you the keys now!” It is likely that he is likely to have a lot of incentive to make the deal occur. However people who aren’t eager to make a move might lack the amount of motivation. This means that you might struggle to negotiate a reasonable bargain.
How much were you hoping to get?
There is a saying in the real estate market: those who state the price first, will are the ones to lose. As an investor you should never be the first to announce the price. Let the seller take this decision and you will be able to take that as the foundation of your negotiation.
How did you decide on that amount?
If sellers have stated an amount they would like to pay, you can ask them to describe the reasoning behind the figure. If they are able to justify the price, it could provide you with information about what’s the worth of their offer. They aren’t justify the price, you could use their inability to negotiate the price to be lower.
What’s the least you would take for all cash and a quick closing?
If a homeowner provides an initial goal price I prefer to follow-up by asking this question. In a psychological sense, it appears that I’m offering some advantage, and the homeowner will feel pressured to give some benefit. For instance If a homeowner wants $150,000 and I later ask for this in return, they is likely to want to do the same and possibly knock $5,000 or even $10,000 off the asking amount on the same day for a cash-only closing.
Is there a homeowner’s association (HOA)? If so, what does it cover, and what are the fees?
HOAs can be both a blessing or an affliction. On one hand, they typically handle maintenance for the exterior as well as common maintenance of areas and landscaping. However you must pay HOA fees. These associations can be a nightmare for compliance that make everything you do with your home a total hassle. When you are considering buying a house it is important to know the specifics of what an HOA is and what it costs.
What are the included utilities, and what are the average monthly bills?
HOAs can be both a blessing or an affliction. On one hand, they typically handle maintenance for the exterior as well as common maintenance of areas and landscaping. However you must pay HOA fees. These associations can be a nightmare for compliance that make everything you do with your home a total hassle. When you are considering buying a house it is important to know the specifics of what an HOA is and what it costs.
CATEGORY 4: QUESTIONS TO ASK THE HOME INSPECTOR OR GENERAL CONTRACTOR
What are the general home characteristics (e.g. bedrooms, bathrooms, square footage, etc)
Prior to purchasing any property it is important to verify the general layout and features. If you’re an investor this info will be essential to create precise comps, to be used for valuation and rental.
For instance, if the home has two bedrooms one and one-half bathrooms, a garage that is one car has a size of 1200 square feet, you’ll utilize that data to determine local rents as well as the values of similar properties. Without this information on comps it is impossible to accurately analyze the value of a property regardless of whether or not you’re planning on flipping the property or using an BRRR strategy.
When your agent pulls data from MLS You’ll confirm it with the report of the home inspector.
Does the home have central heat and air?
Air and central heating particularly in areas with extreme temperatures – can make a the world of difference in the home. For those who flip houses, if you are buying an old home with no central HVAC it is essential to study the homes that have been renovated locally. If other properties that have been renovated have central HVAC, and have central air conditioning, you’ll have to add it to your renovation process. If not, your house will not be competitive when you put it up for sale. This kind of improvement can cost thousand of dollars which makes this a crucial aspect to think about before purchasing a home.
Has the homeowner done any major repairs? If so, are they up to code?
However, when people choose to take an DIY approach to repair and maintenance, they tend to take shortcuts. It could be due to quality issues, or more importantly repairs might not be as good as they should be. If you are an investor you are accountable for these infractions if you purchase the property using these issues.
Note: This is a common question to ask the homeowner and vice versa. However, you’ll need to make sure your home inspector or general contractor can verify that the changes are up to standards.
What repairs are needed on the home?
The house flippers and BRRR investors purchase properties with the intention of rehabilitating them. However, there’s a big distinction in “sprucing up” a place and having to repair damaged foundations or roof holes or plumbing that is broken. These repairs are costly and can be costly prior to moving forward in the purchase, investors have to factor in the repair costs in their deal analysis.
Similar to previous repairs, I would suggest seeking out the home owner about this information. However, you’ll still have to check the repairs you made during an in-depth walkthrough of your general contractor, not only an inspector for your house. Home inspectors usually do not look below the surface and therefore, they won’t detect plumbing, structural, or electrical repairs that aren’t readily apparent.
FINAL THOUGHTS
I am adamant about the long-term benefits of building wealth through real property. That’s the reason I’ve been in the business for over a decade! But before jumping blindly into the first property you invest in you must conduct thorough research. If you can ask these questions then you’ll be able easily answer the most important one: Should I buy this property?
