How to Research Investment Properties Before You Buy

Ten steps every investor, novice and expert alike, should take when considering a potential investment property, whether you plan to rent or eventually sell it.

Before acquiring an property that you hope to rent out and/or flip, you will need to do a lot of background research so as to make a wise decision. Here are ten steps every investor, novice and expert alike, should take when considering a potential investment property:

  1. Learn the lay of the land. If you don't know much about the town or city your target property is in, it's best to start by getting in the car and taking a drive. This sounds obvious, but investors frequently make poor investment choices by assuming the area where their investment property is located is just like another community they're 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 whether 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? 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.
  2. Do some on-the-ground research. In addition to driving around, you've got to explore by foot to truly get a feel for an area. Go into 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 local friends and get their thoughts on the area. You'll be surprised how much people will tell you. Hit the town hall and find out whether there's any development going on in the community. Understanding local development plans, and whether a flood of people and businesses are moving in or out, can give you a gut check on the current property inventory and future market potential.
  3. Run a sales comparison. Before you even sign up with a Realtor, you can find out what properties have recently sold in the area that match up with the size and amenities you're looking for. A simple Zillow search will show you 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.
  4. Find out market rents. If you're going to rent out a residential property, know its true rent potential before you buy. Your Realtor can help with this, and provide comparable sales data. For more information on determining the financial implications of renting out an investment property, see Evaluating Cap Rate: Is That Residential Real Estate Investment Property Worth It?
  5. 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 likely be willing to accept.
  6. Add up all costs of ownership. 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, a seller might provide this information if they know there's an eager investor looking for it.
  7. Evaluate multiple properties. You might feel that a particular property is the one, but it's best to 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 the look of, so you can assess different neighborhoods and have a better sense of your target property's value.
  8. 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 relative attractiveness (or lack thereof) of your target town or city. Don't forget to check the official website of the town, city, or county where the property is located; many government websites include demographics, crime statistics, and other data. For links, check out State & Local and Municode. Another useful resource is Sperling's Best Places which provides a wide range of statistics by zip code.
  9. Determine property potential. Understand how the property is zoned. Would you be able to expand the existing structures? Convert them for some other use? 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 how the town classifies it and the limitations that come with that. If, for example, you want to turn a residential property into a commercial one, a consultation with town managers about zoning concerns is imperative. See, for example, Home Businesses and Zoning Laws.
  10. Examine relevant permit data. Towns, counties, and municipalities are increasingly making data about a property's physical history available online. Or, a trip to the local government administration building can yield results and personal help. Knowing when a permit was actually pulled, perhaps 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.

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