Dec 11, 2023 -
There’s much to think about before purchasing an investment property. The first step is to know and understand your goals, as well as the realities of owning a rental property.
What are your goals? How long do you want to own it? Stated another way, what is your target return on investment (ROI)? Did you include your time in that equation? Knowing answers to these questions can help you decide if investment real estate is right for you.
Owning real estate can help diversify your overall investment portfolio. But unlike the stock market and some other investment options, real estate is not liquid. The need to quickly get back the equity invested in real estate can have catastrophic consequences for the investor.
The first step toward acquisition is to make sure you are acquiring a property at the right price. This goes way beyond the appraised value. Overpaying for a property can also have catastrophic consequences. Sometimes value is in the eye of the beholder, and those with vision (and some capital) can achieve a significant advantage over those who are just focusing on the status quo for a property.
The next step is to focus on the asset itself. Does the building lend itself to its current and/or proposed use? How about its location? Can you attract a wide-ranging tenant base? Is the location in a part of town that is seeing increased interest/activity, or is it stagnant or in decline?
A potential investor must also consider the realities of property ownership. Many folks on the outside think that investing in real estate is easy. You simply buy a building, then sit back, collect rent, and get rich. This scenario couldn’t be further from reality. Here are some "reality check" questions you should ask yourself:
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How much equity am I willing to use to acquire (and improve) a property?
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Do I have enough cash reserves to handle periods of vacancy, unanticipated repairs and/or tenant fit-up costs?
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Do I have the expertise to manage and/or lease the property myself, or will I have to hire a management firm?
The answer to this last question can be complicated. How much time do I have to actively manage the asset? Do I have the skill set and mechanical knowledge necessary to properly and efficiently manage and lease the property?
In addition to the above, the following details can make or break a property and its owner:
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Lease terms
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Key lease expirations (anchor tenants)
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Choosing the right tenants, i.e. strength and mix of tenant base
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Market conditions
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Loan structure and terms
Even some basic loan terms, such as choosing the right amortization period, can contribute to the long-term success, as well as mitigate some risk, in the investment.
Real estate investment is like a jigsaw puzzle in that the pieces need to be put together in a thoughtful and deliberate way, and the time invested is significant.
Real estate investment is intriguing to many folks, and it can be a great option. However, before becoming a landlord, you should assemble a team of qualified professionals to help guide you through the process. Through careful planning and risk management, you will be in a much stronger position to pursue your dreams of owning a successful investment property.
Robert Christensen
Senior Vice President & Senior Commercial Banking Officer
Robert.Christensen@ledyard.bank