As a follow up to my last post, the BF and I talked it out and we even went to go check this place out. We both agreed that although we both love it and would love to live in it, we have to think realistically about why we are buying a place. Our initial and sole reason to buy a place was to rent it out so it should only be an investment property. This means I can't "fall in love" with a place in comparison to house hunting for myself. In BF's words I have to choose with my brain and get the most "bang for our buck" which is totally true. He already brings me back to reality and we really do make a great team.
We decided not to put an offer on the place and researched other areas we thought we could make more money. We had to think outside of the box and let go of some of our wants. I've seen a lot of posts around about what people learned from buying a place but I've never seen anyone list out what they've learned during the shopping process for an investment property so here's what I've learned during this process. I'll be sure to update it once we actually purchase one as well!
1. Play the Numbers
This has played a HUGE part in our shopping process. We have been including closing costs to the purchase price and adding the homeowner's insurance, property taxes, and HOA. This gives us a great snapshot of our monthly mortgage. We also play around with it and lower/increase the deposit as well as play around with the interest rate to see how much it could fluctuate.
2. Be Creative
If you want to fix up a property, think of the renovations you could do to the place. Often times there are great deals as short sales or bank-owned properties right now but they need some cosmetic renos. Calculate and estimate the costs of repairs, labor and materials to see how much you could be saving vs. buying an already remodeled place. Since it's an investment property, you don't have to go all out with the renovations. Do simple upgrades.
3. Use Your Head
This part (as referenced in my last post) has been the hardest part for me. I've been looking for places and getting emotionally attached to them. I have to keep in mind that the property is supposed to be providing a greater return and less risk. An investment property wouldn't be an investment if I didn't take the time to research and use my brain to figure out if it's a good investment or not.
Just with regular house shopping, one must compare, compare, compare! It's easy to get caught up in looking around in the same area but there are a ton of places to check out. Make sure you check to see if the area is developing, what the comps are like, how much previous places sold for or are selling for, tenant to renter ratio, the association and their reserve money, the age of the complex or house, the school district, the proximity to freeways and shopping, the traffic, and the list goes on!
5. Rental Market
This is basically the biggest deciding factor for an investment property because the rental market is who you are catering to. Check out the shopping areas around to get a feel for the people that live there. Visit the place in the morning, midday and at night to see what it's truly like to live there. Check Craigslist for the going rates to see how much you could rent it out for and also talk to people that currently live there and rent out.
6. Money Cushion
Also with regular house shopping, a money cushion should be set in place and accounted for. It is especially important in this case because you need to be able to cover the monthly mortgage for a few months if you can't find people to rent out the property. Also you need to be prepared to pay for that monthly mortgage in case (and hopefully this doesn't happen if you did your homework) you can never find renters! Don't forget you will need money for repairs.
7. Explore the Unknown
Since this is an investment property, you have to be open to places where you wouldn't normally look. We did not want to live in Eastern San Diego or Southern San Diego. We wanted to look by the coast and by the areas with the award-winning school districts. We basically were looking where we wanted to live in but we figured out that we need to look in the areas that are more heavily populated, closer to the main part of the city, and where there is a bigger rental market.
Anything else to add? Feel free to share!
(note: all aspects while regular house hunting should apply as well!)