When the economy is hurting, it is particularly important to be wise with your investments. Fortunately, real estate investments on average aren’t nearly as affected by recessions as some other types of investments might be.
There tends to be a recession every 4 years or so, and yet the real estate industry manages to be largely unaffected. So buying real estate is almost always a good idea – as long as you do it correctly.
You may be surprised to learn that you actually have more control over how successful your real estate investment will be than you might have expected. Because it’s not external factors that make the most difference to your profits, it’s the decisions you make, and the actions you take.
Here are two of the most crucial aspects you need to consider, in order to give your investment in real estate the best chance to grow.
Have an inspection done
A lot of the process of buying real estate is common sense, so this really should go without saying, when such a large amount of money is involved. Yet many people balk at having an inspection done when a property seems to be well-cared for and in good condition. Some buyers feel that the cost of an inspection is too high, even though it is always just a tiny percentage of a property’s purchase cost.
For instance, a seller could produce documentation showing that the roof of a single family home is fairly new and a buyer will think that’s sufficient. But it isn’t. Even if a buyer is meticulous about trying all of the appliances and plumbing fixtures to ensure they are in working order, there are many potential problems that would be extremely expensive to fix which are not visible to the naked eye: roof damage from a storm, severe damages from a leak that has been carefully camouflaged and more.
Not only should buyers have a home inspection done, they should make the sales contract contingent upon the inspection’s results. If any problems are discovered, the buyer and seller will have to agree on how they should be handled. They don’t have to all be handled in the same manner, but here are the 3 main options that will be considered.
- The seller agrees to lower the asking price to cover the cost of the repairs. In this situation, the buyer takes on all responsibility for making the repairs after the sale is completed. This is often a good option for buyers who would like to take possession of a property as soon as possible. But it is only a good decision if accurate estimates are obtained before agreeing upon just how much the asking price should be reduced.
- The seller agrees to make the repairs before the sale is closed. This can also be good for buyers who are eager to complete the sale, if the repairs are fairly minor and probably won’t take long to complete satisfactorily. It may even work for larger repair projects, if they are done in a timely manner. However, it is of utmost importance that the repairs be confirmed before closing, even if that means a follow up visit from the home inspection service.
- The seller maintains that the purchase price has all imperfections of the property already factored in, and must be taken “as is”. At this point, the buyer must decide if the property is still actually worth the purchase price, or if they should walk away from the deal. This is not an easy decision to make when one is negotiating for a new home that they would love to have. But if the property in question is purely for investment purposes, then a cost analysis should hold more weight.
Have a realistic budget.
Before you even begin looking at potential real estate investments, you need to determine what you can comfortably afford. Your lender will have its own requirements and restrictions, but you need to be brutally honest with yourself, not only about your own financial situation, but also about the total costs of buying and maintaining a property.
The first thing you need to be aware of is that the amount a lender is willing to allow you for a mortgage is only the beginning of your expenses. Two more expenses you absolutely must factor in are property taxes and insurance. This is easy to do, since the property taxes might even be on the property listing, and insurance companies will be happy to give you estimates for annual premiums.
Most lenders will let you roll both of those expenses into your monthly mortgage, which is very convenient. You don’t have to worry about them being paid, you don’t have to worry about coming up with a lump sum for the property taxes and you just have to budget one single payment for all three of them.
That total will almost certainly represent the major costs of your real estate investment, but there may be others that could total an amount which will significantly affect your finances. Here are some you might need to consider:
HOA or Maintenance Fees
If you live in a community development, there is very likely a homeowners association responsible for keeping up the common areas, such as sidewalks, communal landscaping and more. The funds needed for these purposes are collected from the homeowners on a regular basis, usually monthly or quarterly. In a building of condominiums, these are usually referred to as maintenance fees.
There are even communities that have both. A resort or country club community, for instance, could have homeowner fees for multi-family dwellings and maintenance fees for the upkeep of the property. In any case, these need to be considered when planning your budget to include the costs of a new property.
If you are considering buying a property with it’s own yard or pool, you have to decide whether you will be taking care of them yourself, or hiring a service to do so. Depending on the area, and the type of landscaping you choose, lawn and pool services can add up.
Have you checked the price of a new roof, lately? That’s not something you want to have to come up with in a hurry. It shouldn’t frighten you off, a roof should last for a very long time, so you can save a little every month to prepare for it. You will definitely want to find out, if you can, when the roof of your new property was installed. That will give you an idea of how long you have before you will have to replace it.
There are also other things that can break down, though, so you will also need to put aside a little every month to cover unexpected repairs. This doesn’t need to be scary, either. One of the best things you can do for extra peace of mind is get a home warranty which will help cover the cost of your major appliances in the event they need replacing.
As you can see, there are pitfalls which can have a major impact on whether you make a good investment when buying real estate, or whether you lose money. But the result rests almost entirely in your hands. Just be smart, make the right decisions, take the right actions and either personal or investment properties can serve you well.