Factors to consider when purchasing an investment property

The process of purchasing an investment property can be different than fi nding a home to live in. For instance, when purchasing a residence, buyers often look for specifi c features such as fl oor plans, fi nishes and aesthetics that are important to the buyer’s specifi c desires to make it feel like their home. When purchasing investment properties, buyers do look at some of the same features, but there are other factors to consider as well:

* Capital appreciation potential. Does the property have features that will be attractive to prospective future buyers, such as: great ocean views, walking distance to the beach, great schools nearby, a desirable neighborhood, open fl oor plan, guest quarters, etc.

* Capitalization rate (Cap rate). This business metric helps to quantify and track the performance level of an investment. Simply, does the net operating income or net cash fl ow (rental income minus operating expenses) provide a rate of return that is competitive with similar properties and other types of investments, such as certifi cates of deposits? Make sure to look at the property’s tax return when determining the net cash fl ow. Just looking at the net operating income on a pro forma fi nancial statement based on unrealistic assumptions may show results that are not achievable.

* Rentability. Does the location and condition of the property make the property easy to rent?

* Zoning. Does the zoning allow for future development of the property? For instance, a property zoned R-5 with over 7,500 square feet of land could possibly be developed into a duplex as long as there are adequate utilities, reasonable access and no major easements on the property. Subsequently, the duplex may be able to be condominiumized and sold separately as two units.

* Association loans and assessments. For condominiums, make sure you understand whether there are existing and/or upcoming Association loans or assessments. Association loans and assessments can lead to much higher expenses and signifi – cantly reduce your future cash fl ow.

* Condition. When purchasing an investment property, an investor must have a complete understanding of the property’s condition. Unforeseen future repairs can be very costly and severely reduce your future cash fl ow from the property.

* Condition of the properties in the neighborhood. Being in a neighborhood with well-maintained properties may make your investment property more desirable to prospective future buyers.

Better Homes and Gardens Real Estate Advantage Realty
Contact 808-864-9000
Email myronk@betterhawaii.com
Web myronkiriu.com