3 Critical Questions to Ask Yourself before Buying an Investment Property

Not all of us are equipped with the right information or have full data access when we invest in a property. We may not even have done a full forecast of the returns we will be earning.

But even if investing can be a challenging venture, you can still learn how to evaluate your planned investment whether you’re a part-time landlord or a full-time one.

Three critical questions should be considered when scouting for an investment property: whether you are keeping it over the long term or planning to flip it.

This method can help you assess whether a property you are checking out is a great buy or should be passed over.

You can come up with a great strategy to succeed in this way and easily see what the best deals are that will provide you with the most optimal income.

Mastering three essential questions will help you determine whether a planned investment has a high success rate.

You can focus more on the vital things to consider by asking yourself these three questions.

  1. What is your game plan to profit from your investment?
  2. What is your risk exposure level and the specific risks involved?
  3. How can you prevent or reduce the risks?

Let’s go through each of these questions one by one. Keep reading this article to learn more!

a mortgage broker writing down interest rates on a whiteboard

What Is Your Game Plan to Profit from Your Investment?

If you are new to investing, you may have difficulty working out the specific steps to make money and earn a viable income from your investment.

It is always best to have an in-depth understanding of the process rather than holding superficial information.

For example, planning to convert a unit into a rental space needs proper evaluation.

After finding a property that meets your requirements, you also would need to map out how to market to potential tenants, develop a rent collection system, and end up with a positive cash flow.

While you can work out the process to profit, you also need to entertain specific details, such as

  • Setting an accurate rental price that leads to a profitable business
  • Calculating the best way to compute an expected income
  • Working out if the property can gain more appreciation and by how much. Should the expected appreciation be slower than predicted, would your property still gain profit?
  • Knowing the factors that lead to excellent deals

Since investing in a property requires steep costs, you need to be more detailed and grounded in facts. Coming up with a profitable strategy is a must so doing great research is advisable.

a mortgage broker writing down interest rates on a whiteboard

You can role-play and act as the property seller who wants to pull in an interested investor to proceed with the sale. It is best to offer concrete information to argue your case and succeed.

What Is Your Risk Exposure Level and the Specific Risks Involved?

Even if it is essential to compute the costs and expected returns on investment, you also need to know the inherent risks present in the property you are investing in.

If you simply look at the upsides, you may end up losing from the investment.

For example, if you plan to buy a property and flip it, you need to budget for property upgrades to entice buyers.

But you can run into tough issues, such as expensive repairs to ensure your electric system meets the current safety standards.

This can lower your potential earnings when you sell off the property. If it costs more to renovate a unit than to earn a profit, then you are not getting a good investment deal.

Unfortunately, this is all too common in the property investment industry. That’s why you need to consider the risks and learn what they are to properly compute your expected expenses to fix the existing problems.

Below is the list of risks properties are exposed to:

Risk Factors Present in Rental Spaces

  • Sudden repairs
  • Conflict-ridden residents
  • Long vacancy gaps
  • Lower appreciation due to decreased market demand or bad neighborhood

a person sitting on a sofa reading papers

Risk Factors Present in Property Buying and Selling

  • Increased spending on planned renovations
  • Delays in improvement projects
  • Market slowdown or market crash leading to decreased asset value

Pushing through with an investment in the face of a bunch of risks is not recommended. You can end up suffering from losses.

By raising your awareness level, you have a greater chance of absorbing the disadvantages of a bad investment.

How Can You Prevent or Reduce the Risks?

Investments always entail risks and you cannot guarantee a flawless resolution that can eliminate all types of property investment risks. But coming up with a system that lowers your risk exposure level is possible.

Instead of ending up with a bad renter which can cause a lot of stress and issues, you can design a detailed tenant screening procedure and launch a marketing strategy that expands your reach to attract top-tier renters.

You can also do better by choosing properties with outstanding locations, which generally have trustworthy residents.

It is crucial to come up with strategies that ensure you hit your goals and conduct a thorough analysis to reduce your risk exposure.

All maintenance issues may not be resolved totally but you can prevent possible losses by knowing how to measure your risk levels.

Bottom Line

Investors will often have many investment strategies to choose from and you must know which one to use.

You need to know the benefits and drawbacks of each property you plan to invest in and work out your profitable methods, including analyzing the risks in real estate, and how to counter those risks.

Even if you can identify all the risks in your planned investment, you also need to keep in mind that you cannot eliminate all risks.

However, if you are realistic about the challenges you will meet, you can avoid huge losses and still end up with great profits from a planned investment.

Contact us today at Gifford Property Management to learn about our property management services!

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