Choosing Your First Investment Property
Today’s market opportunity is gaining the attention of many first-time investors.
Some are attracted because real estate is a tangible investment and easy to understand. Others see it as a solid investment in a volatile marketplace. Few recognize the potential for long-term reward.
Looking at Hawaii’s real estate prices over the past 40 years, history shows it to be a long-term investment that builds wealth. At the end of each price run, Oahu’s property prices approximately doubled what they were at the beginning of the run. While prices may have bumped around a little after each price run, the trend over time has always been up.
The key for real estate investors is timing.
Toan Doran is a partner and REALTOR at Prudential Locations who specializes in the needs of investors. In recent months, he has seen an increase in first-time investors and notes that they are coming in with cash, signaling that they’ve been watching and waiting to time the market.
“Now is a great time to jump into the market as a homebuyer or a first-time investor, because all things are in alignment,” he explains, ticking off each point on his fingers. “You’ve got prices bouncing off the bottom, low interest rates, and at this point sellers haven’t caught on yet that it has become a sellers market.”
Choosing the right investment property isn’t rocket science but it isn’t a simple equation, either. Approaching it with thoughtful consideration and enlisting the expertise of a real estate professional can help you find the best property.
KNOW YOUR GOALS. Are you looking for a long-term or short-term investment? How do you want to make money from the investment? For example, do you want ongoing income, long-term appreciation, or to renovate a property and flip it for a profit?
KNOW YOUR ABILITIES. How much do you have to invest and what can you afford? Investment financing requires a larger down payment of 30 percent to 35 percent down, but, says Doran “today’s financing is very attractive. The rates are in the mid-4 percent range. Just a few years ago, interest rates for investors were 6.5 percent. Today your buying power is greater.”
GET PREQUALIFIED. This is as important a first step for investors as it is for homebuyers, explains Doran. “Once you’ve secured your cash and gone through a pre-approval process, the loan officer will tell you what your monthly payments will be according to the interest rate that they can secure for you. Once you know this, you and your agent can work out the equations for cash flow and rate of return.”
CONSIDER THE BEST TYPE OF PROPERTY FOR YOUR GOALS. You don’t need to love a place that is strictly an investment, and you shouldn’t let emotion sway your decision – unless you’re investing in a property that you plan to vacation in or live in some day. Choosing an investment property is a financial decision and it is best made when evaluated as such.
WORK OUT THE FINANCIAL EQUATION. Before purchasing any investment property, run the numbers to make sure it is actually a smart investment. Consider your budget, the financials of the property (such as taxes, mortgage pay-
ments, association fees, property management), and any repairs that will be needed.
DEVELOP A PLAN. With your goals and finances in hand, you are ready to go shopping. Having specific criteria and working with a real estate expert will make your search most efficient and effective. You’ll find it easier to evaluate properties against the financial equation you’ve worked out.
DO YOUR RESEARCH. Look for hidden costs such as planned assessments and hidden savings such as lower monthly fees or property taxes. Probe for financial risks.
LOCATION, LOCATION. This old adage holds true for investment properties, too, whether you’re looking for rental income, a short-term sale or a second-home. Make sure you research the history of renter demand and the rate of appreciation in the building or neighborhood. Consider the power of location as it relates to your investment.
SET A TIMELINE. Not all properties will be an optimal investment for you for all times. This is especially true if you’re looking to renovate and flip, or to hold for a shorter period of time. Monitoring the performance of your property and the local real estate market will be important to maximizing the value of your investment. This is why it’s good to keep in touch with your experts on a regular basis – your real estate agent, property manager, and tax or financial planner. They can help you know when it is time to make changes.