4 Tips when Buying an Investment Home

You should approach the process of buying an investment home much differently than you would approach buying a primary property. Your investment home is not meant to fit your personal needs. Rather, it should be a financial asset like any of your other investments. The needs of renters or future potential buyers will be more important than your needs for the property. If you can see the property through this lens, you will be able to make a sounder financial judgment.

#1 Decide Where to Buy

Location is the number one rule in real estate. When you are purchasing a home for personal use, you can make a decision to compromise on location to meet other needs. For an investment, though, the location of a home becomes more important. You do not have to buy in the most desirable locations. However, if you plan on selling the home for profit, you should be looking for a home that is priced below the market in a specific area. This gives you room to grow. If you will be renting the property, always look into current rental listings for comparison in the area.

#2 Consider Alternative Investments

The money you spend investing in a residential property could be spent elsewhere. Therefore, it is important to consider the alternative investments when you choose a property. Run a comparison between the costs and gains of investing in residential property, including any time spent maintaining the property, and what you could spend and earn by simply purchasing stocks or mutual funds. You may find that buying a property is not always the fastest or easiest way to make a return on your investment.

#3 Treat the Property Like an Asset

If you do determine that property is the best investment you can make with your money, you must remember you own an asset and not a home. This means spending money on the property only when you are certain you can generate a return. For example, you may add a swimming pool to your own home for personal use. However, all the same reasons for which you made that decision cannot be used with your investment property. You must make changes only when you can quantify the change in actual profit. For example, if you are renting the home, a tenant may ask you to replace an outdated stove. If replacing this stove will keep the unit rented and potentially even raise rent in the future, the investment is worthy.

#4 Have an Exit Strategy

All good investors have an exit strategy. You should know when to walk away on either the upside or the downside of your investment. For example, you may have the property appraised and learn that it has gained 25 percent in value. If your exit strategy is to sell at a 20 percent profit, then it is best to sell the home now. Otherwise, you could fall into the common problem of not knowing when to walk away, always thinking you could earn a few more dollars. Though real estate is not an incredibly fickle investment, it is also not a sure thing. Follow your plan to avoid losses due to market swings.