Appreciating home prices are enticing people to expand their investment portfolios into real estate. While some prefer to buy and hold, others are looking for a quick way to flip properties for profit.
Home prices nationwide rose 6.9 percent in January 2017, as compared to the same month in 2016, and they’re predicted to rise again throughout the remainder of 2017. As with everything in real estate, though, location is key, and in some markets, prices are rising far faster than other areas. Price appreciation, however, isn’t the only consideration when it comes to investing in real estate. Solid returns on real estate investments also can come from property improvements or cash flow from rental income.
In this two-part blog post, we’ll discuss four major factors to consider when investing in real estate, and here are the first two.
Decide whether you should flip or buy and hold a property. Now that you’ve decided to invest in the housing market, you need to determine whether you would prefer to flip a property (that is, buying, upgrading and selling a property within a year) or prefer to hold onto it for rental income.
You should make this decision on both a financial and a lifestyle basis. If you want to join the flipping trend, which reached a 10-year high in 2016, you’ll need a team of professionals to help identify a promising property, estimate repair costs, negotiate the purchase, find contractors for the upgrades and sell the property for a profit. While flipping can be lucrative, it also requires local expertise and a willingness to take on some risk about the property condition. According to RealtyTrac, the median gross return on investment for a flip was 49.2 percent in 2016, but that number is a straight comparison of the purchase price and sales price, not including renovation and holding costs.
If your financial goal for an investment in real estate is cash flow, then you’ll want to buy and hold a property for the long-term. A real estate agent can help you evaluate available homes to find a lucrative rental property.
Choose whether to buy locally or long-distance. While you may feel most comfortable investing close to home, many investors purchase out-of-state to take advantage of specific market conditions. It can be harder to achieve a good return on your investment in a market with higher housing costs. As long as you’re careful with your numbers and pay attention to the price of housing, average rent for similar properties and rental demand, you can position yourself for investment success. Make sure to compare housing prices with rents in order to estimate your positive cash flow, too.
Additionally, thinking like a renter can help in your investment: look for a property near transportation, recreational amenities, nightlife or employment centers that would appeal to young renters. If you’re investing in a larger property that might appeal to a family, check out the school district and family-friendly activities.
No matter where you invest, you’ll need to purchase a landlord’s insurance policy to cover your investment. You can also include the obligation to buy renter’s insurance as part of your lease agreement, so that your renters have liability and personal property coverage.
Next week, we’ll share with you the final two factors you should consider before investing in real estate.