Like all investments, purchasing a rental property requires research, diligence, and preparation. Under the right conditions, investment property provides some the most consistent and sustainable returns possible, and while it takes more effort than simply adding cash to a stock portfolio, the income can be profound and persistent.
Nothing will guarantee success in real estate investing, but by taking the time to properly investigate every potential property, you increase your chances of long-term profits and reduce the chances of financial setbacks.
This investigation and preparation can’t be done spontaneously. You need to have a defined, detailed process that is conducted the same way with each and every property. Real estate can be expensive, but with the right preparations and due diligence, you’ll have better results with every purchase!
Rental Property Investment: Your Pre-Purchase Checklist
Market Analysis
All property investments should start with a thorough analysis of the market. You aren’t buying a personal home where you will live your life, raise your children, and create wonderful memories; you’re buying an investment, which calls for cold-hard research! Your research should start with an online search, but you can’t stop there; talk with real estate agents, appraisers, lenders, and anyone else who may provide insight on the quality of the market.
What you’re looking for is not just property values, but the trends in property values. Are properties in the area going up or down? Are you getting a bargain or paying well above the neighborhood average? Are there any upcoming changes, such as a major company moving to town (or leaving), that will increase or decrease home prices? These are all questions that need to be asked.
Research Comparable Rental Rates
How much will you be able to collect on a monthly basis? This is an important factor for your investment returns, so you need to be thorough and gather as much information as possible. You can look at listings or talk with area landlords to get a complete understanding of reasonable rent for a similar home in your area.
See the Property with Your Own Eyes
It’s never wise to purchase a property that you haven’t seen yourself. Make sure to tour the property, even if it’s located hundreds of miles from your home. If you can’t see it yourself, remember that this is not the first nor the last investment property that will come available. A thorough walk-through, and the willingness to walk away, is essential before all purchases.
Hire Professional Inspectors
If your personal walk-though didn’t reveal any obvious issues, it’s time to let a professional search for the less obvious. It’s much better, in the long run, to hire an inspector before every purchase instead of buying properties without proper inspections. There can be many different types of inspections, including a general inspection and inspections for termite damage, lead paint, asbestos or structural issues.
Conduct a Title Search
It happens more often than you might think. Someone buys a property only to discover that the seller didn’t have a complete legal right to sell it. Suddenly your investment is tied up in courts because the seller’s brother, cousin, or ex-spouse claims legal ownership. Conduct a title search on the property to confirm that the title is free and clear of any complications. Even after the title is checked, you may want to consider title insurance, which protects you if any “owners” come seeking compensation.
Have a Land Survey
A land survey can be extremely beneficial, especially if you are purchasing a property with large tracts of land and few to no clear boundary markers. Make sure the property you want to buy matches what is legally owned by the current title holder, and confirm that any buildings or structures do not go into someone else’s land. This step will help you avoid significant legal headaches in the future.
Verify the Zoning Laws Where the Property is Located
It’s extremely rare for a house to be located in a zone where residential use is no longer permitted, but zoning laws can change. Since the property was built, there could have been a shift in zoning, and it’s possible that changes you wish to make could no longer be allowed. The area could also have been rezoned for commercial and industrial use, which could impact the value (both up or down) for the property. Before buying, confirm the property you wish to purchase is zoned the way you wish.
An Environmental Assessment
There can be numerous issues that apply to the environmental assessment, so having this step completed before you purchase is important, especially older homes and unique properties. An environmental assessment could show that the lot was previously used for manufacturing, which could create health issues for people residing in the home. Or it could reveal that the property includes a protected wetland, which may limit your ability to change or remodel the house.
Have the Home Appraised
Appraisals are important for many reasons, especially if you are purchasing the home as an investment that you will promptly sell. You should have the property assessed as a single-family rental investment so you understand the exact value as it applies to your situation. An appraisal will impact many different aspects of your purchase, including mortgages. This is because the value of the home compared to the loan amount (known as loan-to-value ratio) will impact the terms of your loan, including interest rates.
Find the Right Loan Option
Financing for your rental property investment can be complicated, so it’s important that you take the time to speak with a qualified lending officer that can show you all the details of multiple loan options. Different loans are available (and ideal) for different types of purchases, so working with a lending agent who understands investment properties is crucial.
Put Our Mortgage Experience to Work for You
If you want help finding a great loan for your investment property, let the team at San Diego Purchase Loans go to work for you. We have an expert-level knowledge and understanding of the mortgage industry, which allows us to find an affordable loan that will fit your specific needs.
