Residential Investment Property Basics: 5 Key Factors to Consider
My clients often ask me what is the key to buying good investment property? I recommend you consider the following 5 factors to determine whether investment property is right for you:
- Personal Liquidity - How much money do you have for the down payment, associated closing costs, and mortgage payments in the event of vacancy? Do you have enough money to weather a repair storm? Will your personal life be on sound financial footing after acquiring the property?
- Free Cash Flow - How much money will you clear on a monthly basis after making your mortgage payment consisting of PITI (Principal, Interest, Taxes, and Insurance)? I like to shoot for a free cash flow, that when annualized equals 8% (at a bare minimum) of my initial investment amount (as measured by down payment + closing costs) only.
- Appreciation/Depreciation Potential - What is your time horizon on this investment? How long do you anticipate holding the property before liquidation? Is the price of the residence likely to move up, down, or sideways based on microeconomic factors? Be sure to consider the neighborhood, planned or completed commercial developments, residents' employment opportunities and the demographics.
- Proximity to You - I have found that one of the most overlooked aspects of residential investment property is the ability to service the property in a prompt and timely manner. If the property is far away from you, you will have to have a trusted confidant who can relay strong messages to you about the property's condition, honoring repair requests from tenants, and actually making the repairs. Running down money, assessing fees, and performing normal administration work can be a lot easier if the property is close to your backyard. The fewer people involved in these issues, the better.
- Viable Tenants - Searching for properties where you will be likely to find viable tenants is crucial to your decision. You must locate property where there is, or will be, good rental demand and where that demand is generated by people who can comfortably and willingly afford your pricing model.