Buying investment property in COLUMBIA is a great way to make additional income for you and your family. Different investors use different calculation methods to determine if an investment is right for them. Before you make any large investments, please take into consideration our rules for buying investment property!
Location, Location, Location
Yes, this has been said before, but this is a huge factor when buying investment real estate. You can change ANYTHING about a home, aside from where it is built. You need to find a neighborhood where people want to be. A great house in a bad area isn’t going to get you the profits you are looking for. So what do you want to see in a location?
- Convenience. Most people will want to get to the grocery store in a reasonable amount of time.
- Low crime. You do not want to have to deal with vandalism, theft, or dealing with bad tenants you might find in a high-crime area
- No main roads. Nobody wants to hear traffic noises all day, or have high traffic in front of their home where children might be playing.
- No commercial property nearby. Commercial properties encourage noise, traffic, litter, and vandalism.
- Proximity to schools. You will need to find a sweet spot as far as distance. Families will want a quick commute for their kids, however, homes adjacent to a school will often have lower property values. This is due to more traffic and kids loitering in the area.
- Things to do. You can tell it’s a good neighborhood if you see parks, shops, and restaurants nearby.
Know Your Numbers
Different investors use different equations to determine if a property is a good investment. One method is to use your “Cap Rate.” The short version: The Cap Rate is your net income divided by the asset cost. So let’s say you buy a house for $150,000. You rent it out for $1000 and incur about $200 a month in expenses. You will net about $800 a month, or $9600 per year. You would then divide $9600 (your net income) by $150,000 (what you paid for the house.) In this example, you would end up with 0.064 or a 6.4 percent return on your investment. You should have goals in mind, and if the property isn’t meeting them, then you should consider a different house!
Another method used by investors is the 1% rule: This rule states that a house you are renting out should bring in 1% of your purchase price each month. This can change from market to market, but it is a great guideline to use when determining the value of a house as an investment.
Some investors use a 50/50 rule to keep them on the right track. This rule states that 50% of the profits will go to expenses other than the mortgage. This includes repairs, taxes, and rental costs.
Investors employ various methods to evaluate whether a property is a sound investment, and two commonly used metrics are the Cap Rate and the 1% Rule. The Cap Rate, a fundamental financial indicator, is calculated by dividing the property’s net income by its acquisition cost. For instance, if a property is purchased for $150,000, generating a net income of $9,600 per year, the Cap Rate would be 6.4%. This percentage reflects the return on the investment. Investors often establish specific goals, and if a property fails to meet these objectives, they might consider exploring alternative investment opportunities.
Meanwhile, the 1% Rule is another guideline that investors frequently apply. According to this rule, a rental property should generate monthly rental income equal to 1% of the purchase price. Although variations exist based on regional market conditions, the 1% Rule is a useful benchmark for assessing a property’s investment potential. For example, a property purchased for $150,000 should ideally yield $1,500 in monthly rental income to meet the 1% Rule.
Additionally, some investors adhere to the 50/50 rule to maintain financial balance. This rule allocates 50% of the profits for expenses other than the mortgage, encompassing repairs, taxes, and rental-related costs. Adhering to these financial principles helps investors make informed decisions, ensuring that their real estate investments align with their financial objectives and provide a satisfactory return on investment.
Don’t Get In Over Your Head
Maybe people get involved in flipping homes because it looks fun, or because they have seen it on TV. There is much more to owning a successful investment property. If you are not familiar with rehabbing a home, don’t purchase one that needs a lot of repairs. You will want an inspection done to ensure there isn’t damage lurking behind the walls. There is nothing worse than going to repair one thing and being met with 10 more things you found under the surface. Working and partnering with a like-minded team will help your investments thrive. If you are a novice investor, working with other people in the industry will help you to grow!
Engaging in the practice of flipping homes may initially appeal to individuals due to its perceived excitement or the influence of television shows highlighting successful flips. However, the reality of owning a profitable investment property extends beyond surface-level enthusiasm. For those lacking familiarity with home rehabilitation, it’s crucial to exercise caution, especially when considering properties in need of extensive repairs. Conducting a thorough inspection is essential to uncover potential hidden issues behind walls or within the structure. The disappointment of discovering unforeseen challenges during the renovation process, often referred to as “unforeseen issues,” can be a significant setback for inexperienced investors.
One of the keys to navigating the complexities of real estate investment, particularly in the realm of property flipping, is establishing a collaborative and like-minded team. Partnering with professionals who share similar goals and possess expertise in various aspects of the industry can significantly contribute to the success of your investments. This team-oriented approach not only helps distribute the workload but also provides access to diverse skills, ensuring that every facet of the property flipping process is managed effectively.
For novice investors, collaboration becomes even more critical. Working alongside experienced individuals in the real estate industry offers a valuable learning opportunity. Seasoned investors can provide guidance, share insights, and help navigate potential pitfalls, ultimately facilitating the growth and development of those new to the investment landscape. The importance of mentorship and partnership cannot be overstated, as they play a pivotal role in transforming real estate ventures from mere aspirations into successful and sustainable investment opportunities.