How to Research Investment Properties Before You Buy
Ten steps every investor, novice and expert alike, should take when considering a potential investment property.
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Before acquiring an investment property, you will need to do a lot of background research to make a wise decision. Here are ten steps every investor, novice and expert alike, should take when considering a potential investment property:
- Learn the lay of the land. If you don’t know much about the town or city your target property is in, there’s no better place to start than to get in the car and take a drive. It sounds obvious, but investors frequently make poor investment choices by mistaking the area their investment property is in to be just like another community they are familiar with. By driving around, you can learn the access routes to the highway and get a sense of the traffic. You can also see if there is an adequate town center, accessible public transportation, good shopping, or other factors important to your potential renter or buyer. Does the area appeal to you and do the nearby properties look well maintained? If you don’t like what you’re seeing, chances are that a renter or future buyer of the property won’t either.
- Do some on-the-ground research. Driving around is fine, but to thoroughly get a feel for the area, you’ve got to explore by foot. Go in local stores and restaurants and talk with the managers about what it's like to do business in the community and/or live there. Call your friends or other people you know who live or work nearby and get their thoughts on the area. You’ll be surprised how much people will tell you. Hit the town hall and find out if there’s any development going on in the community. Understanding local development plans, and if people and businesses are moving in our out of town, can give you a gut check on the current property inventory that exists and the future market potential.
- Run a sales comparison. Before you even work with a Realtor, you can find out what properties have recently sold in the area that match up with the size and amenities of the property you're considering buying. A simple search on Zillow will allow you to pull up sold properties within a particular town or city. You can also ask your real estate broker to produce a list of more specific, comparable properties in the area. Knowing how much an investment property is worth will help you gauge its value and determine potential growth.
- Learn market rents. If you’re going to rent out a residential property, know the true rent potential before you buy it. Your Realtor can help identify this information, as well as provide comparable sales data. For more information on determining the financial implications of renting out an investment property, see Is That Residential Real Estate Investment Property Worth It?
- Check out the local registry of deeds. Find out the current mortgage and last sale price of your target property, and see if there are any liens on the property. These are all public records, most of which can be found online. Knowing this information will help you understand your negotiation boundaries for buying the property, and the price the sellers will be willing to accept.
- Get all costs. In addition to the property taxes, ask your Realtor if he/she can obtain data on the current expenses of the property, such as utilities and insurance. If it’s a commercial property this should be no problem. For a single-family home, this may be tougher, but a seller may provide this information if they know there is an eager investor looking for it.
- Evaluate multiple properties. You may feel that a particular property is the one, but you should look at multiple properties before making an offer. Ask your Realtor to show you several within your price range, including properties you don’t like, so you can assess the different neighborhoods and have a better sense of your target property’s value.
- Obtain local statistics. Look at how the town or city compares with other localities in the area. How do the schools stack up? What’s the median income? Unemployment rate? What’s the population count, and is the community growing? How do the real estate taxes compare to nearby towns? All this will help you better understand the attractiveness (or lack thereof) of your target town or city over others. Don't forget to check the official website of the town, city, or county where the potential investment property is located; many local government websites include demographics, crime statistics, and other data. Check out State and Local Government on the Net and Municode for contact information. Another useful resource is Sperling's Best Places which provides a wide range of statistics by zip code.
- Determine property potential. Understand how the property is zoned. Can you expand it? Can you convert it to something else? What are the setback regulations from the street and bordering areas of the lot? If you have visions of developing the property, you need to know the town’s classification of the property and the limitations that come with that. If, for example, you want to alter the property’s use by turning a residential property into a commercial one, this will likely cost you in attorney fees, but a consultation with town managers is imperative in order to find out if that is a step you could even successfully take. See Dealing With Zoning Problems for more on the subject.
- Examine permit data. Towns, counties, and municipalities are increasingly making permit data more accessible. You may be able to find your property’s physical history online, but a trip to the local government administration building can yield results if a web search can’t. Not every community will have this on hand, but it’s nice to get it if you can. Knowing when a permit was actually pulled for a furnace installation, or a new roof, will help you determine the seller’s honesty when those matters come up during the negotiation. Discrepancies learned can result in actual dollars saved.