The most common reason for becoming a real estate investor is to secure a future for yourself within which you will have a steady income. To do so, you have to make sure you choose the elements of your investment portfolio very carefully. Said succinctly, some diamonds in the rough are better off left on the ground. With that in mind, here are seven factors that can affect property value when investing in real estate.
Negative Cash Flow
A property must be capable of generating a positive cash flow as soon as possible if it is to be considered a solid investment. After all, every month you own a property that doesn’t take in more than it costs to own and maintain is a month farther away from that comfortable retirement you’re seeking to secure.
An Undesirable Neighborhood
Bad neighborhoods attract bad tenants. While that might sound like much too broad of a generalization, it’s always a good idea to invest in neighborhoods with good schools, strong civic pride and low levels of crime.
High Property Taxes
This one you’ll have to try to balance against the quality of the neighborhood and the amount of rent you can successfully command. In most cases, your profit is made when you buy rather than when you sell. If you wind up having to spend more money than you’re making (negative cash flow), it’s a bad investment. High property taxes are a cost that doesn’t go away and could be the difference between positive and negative income.
Excessive Vacancy Rate
One of the key things you should do when you’re considering purchasing an apartment building is inquire about its vacancy rate. In addition to the rate for the building, you should also make an effort to find out what it is for the neighborhood in general. There may be something going on in the area potential tenants know to avoid. Before you sink capital into an area, make sure people want to live there.
When you’re buying a home or a building for investment purposes, it’s always a good idea to go the Recorder’s office to see if any permits have been issued for developments that could have a negative impact on your investment. Picture it; you just got a killer deal on a four-story building with an exceptional view of a lake. Then, six months later, an eight-story building goes up between your building and the lake. There goes the premium you were charging for the view.
Potential For Certain Natural Disasters
Granted, nobody knows when the next big earthquake will hit. But some areas are more prone to hurricanes, flooding and tornadoes than others. Buying an investment property on a known flood plain is a crapshoot at best. Plus, insurance costs are likely to be higher (if you can even get insurance) because insurers know the potential exists and aren’t willing to take on the risk — so neither should you.
Poor Job Market
Tenants can only pay rent when they have jobs. Before you invest in a property, check out the local job market. If it’s up and coming, that’s a good thing. If it’s on the decline, you’re better off looking elsewhere, unless you’ll enjoy watching your investment erode with the job prospects after the area’s big employer decides to move to a more fruitful area.
Found this useful? Subscribe to our real estate Blog to receive FREE articles and training guides.