Getting started in real estate investing can be exciting but it also comes with big risks. After buying a property, paying closing costs, doing rehab and marketing to find a new client, many new real estate investors can find themselves losing money rather than hitting their five- or six-figure profit target. So when you’re looking for your first investment property, here are some criteria to help you weed out potential losers.
Pick a Neighborhood You Know
The first thing you should do when starting your search for an investment property is to decide on a location. New investors often look for hot, up-and-coming neighborhoods and then will get burned due to their lack of local neighborhood pricing knowledge. In a trendy neighborhood, each block may behave differently, and when you’re putting hundreds of thousands of dollars on the line, you shouldn’t risk losses due to a rookie mistake.
So while there may be better opportunities in another part of town, you should start with a property in an area that you know well. Follow home listings for a few months to get an idea of how prices are doing generally and how much homes in the area are worth, in a variety of conditions.
Look for Outdated Styles
The best way to make a quick buck in real-estate investing is to find a high-quality structure that has outdated decor. If the outside of a house is ugly but its bones are good, you can make it look like a brand-new home without breaking the bank. These are prime properties to buy at a bargain price for either fix-and-flip sales or to turn into an income-producing rental property. (For more, read: Can’t Sell Your Home? Rent It.)
If you can limit your rehab work to basics like paint, flooring and new cabinets, you’re in great shape to make a profit. And while kitchen and bathroom remodels can be expensive, they’re often a great place on which to focus for a high return on investment.
Avoid Structural Problems
While you can do surface repairs on a budget, deeper structural issues in a property can mean lengthy, expensive repairs and subsequent investment losses. So always inspect the house with an experienced professional to decide if the structure has potential or if its flaws are just too deep to be salvaged without a massive investment.
Foundation repairs, for example, can cost tens of thousands of dollars, as the house may have to be physically lifted up with a jack during repairs, which often require expensive equipment. Look for signs of structural damage, such as cracks in walls, floors and ceilings.
Beware of Pool Maintenance
A swimming pool can be a great addition to a property but it also can be a money pit. If the pool has fallen into disrepair, the costs of fixing it can easily be greater than $10,000. A pool with cracks or chips in its concrete lining may need a full facelift. Also look out for any damaged and broken filters, heaters and other pool accessories.
Be Prepared for Cost Overruns
When you’re ready to pull the trigger and buy your first property, make sure that you have plenty of cash on hand. In addition to the cost of the property, you’ll have to pay for any rehab out of pocket. And building materials, contractors and laborers aren’t cheap.
Many new investors make the mistake of underestimating these costs and wind up in a bad situation where they can’t afford to complete the project. So if you don’t have the capital to buy the house and do all of the work while having plenty of cash left over, you’re going to need to save more, look for a partner or find a lender to help you bridge the gap.
The Bottom Line
Real estate investing can be a great income source, whether as a part-time or full-time business, and it’s comforting to know that every successful investor began with their first property. If you want to get started in real estate, you’ll need to do plenty of research and pick a house that you know you can comfortably purchase, fix up and turn into a profitable asset.