7 Things to Consider When Buying an Investment Property

7 Things to Consider When Buying an Investment Property

While it can be rewarding, buying an investment property is no small undertaking when starting out in real estate investing.

You are likely putting a lot of your hard-earned money into an investment property, so it’s important that you know exactly what you are getting yourself into.

To help guide you into a successful real estate investing experience, consider the following seven items

1. Do you know what you are doing?

Real estate investing is not the industry to dive into head-first without having done your research. At some point you will have to give it a whirl, likely without knowing every single thing you need to know, but you should at least have a solid handle on what you are pursuing.

There are so many different kinds of properties to invest in and ways of being a real estate investor that the first step should be identifying which option fits your goals, interests, and skill level. Once you identify an avenue of real estate investing to pursue, you need to learn the basics of that particular method: how to go about it, what is required to succeed in it, what are the risks, etc. If you can’t respond to these questions, you don’t know what you are doing. Yet.

2. What is your skill level?

This is another question worth answering honestly. This is not the time to try to sound better or more skilled than you really are. What you have to realize with real estate investing is that all different ways of going about it come with different skill requirements. You can invest in a property that requires next to no skill on your part, outside of just being able to do basic due diligence, or you can invest in a property that requires very advanced skills. For the latter, if you don’t have the required skill level that the property may require, you could be setting yourself up for major trouble.

What is your personal skill level, compared to what the investment property or strategy you are looking at requires? Again, don’t flatter yourself; now is not the time.

3. Do you know the numbers?

You have to know the numbers. The whole point of investing in real estate is to make a financial gain…You have to know the numbers.

If you are flipping a property, what is the After-Repair Value (ARV) of the property? How much do you anticipate the rehab will cost you and how certain are you of that number? How much room for going over budget do you have before you start to lose money? What are the financing terms and payments?

Not all numbers can be known upfront — some have to be estimated and some are forecasted — but you should have a solid business plan and working spreadsheets for any property you are seriously considering. If you are unfamiliar with how to run the numbers for the particular investment strategy you are pursuing, it’s way too soon to start investing. Take the time to learn the numbers. Otherwise you might be tossing money to the wind and not making money on the investment property you purchase. You could even end up losing more than you put in.

4. Can you identify the risk factors?

Almost as important as the numbers are the risk factors. What are all of the ways you could lose the money you are predicting that you will earn? The more risk factors you can identify ahead of time, the more opportunity you have to mitigate those risks. When you are able to mitigate risk, you are more likely to succeed in your real estate investing.

What kinds of things can contribute to risk factors?

  • Property quality
  • Location (“Location, location, location”!)
  • Loan type
  • Your skill level
  • Accuracy of pro formas/financial statements

Each of these can create challenges to the success of your investment property. Understanding the risks and how to properly mitigate them, will set you miles ahead.

5. Where are you buying?

Of all the risk factors, the property location is key. It’s not just the neighborhood that matters, but also the larger market, or the “macro-market” of where the property is located. The specific city, and in some instances even the neighborhood, constitute the “micro-market”.

Both the macro-market and the micro-market are important when it comes to the potential success of your investment property. For example, if you invest in a growing market versus a declining market, you are going to be much better off for exit strategy options. Demand is higher in a growth market which can drive property values, make overall desirability greater, and ultimately allow you to sell the property for top dollar. Whereas with a declining market, you may not even be able to find someone to buy your property and even if you do, you may not be able to get as much for it as you would like. Learn how to find the best investment properties to buy here.

The end game with an investment always involves people, and the more people that want your property, whether it be to buy the property as a primary home, buy it as an investment, or even to rent it, the more profit you can expect.

6. What is your exit strategy?

What is the end game for your investment property?

If you’re flipping it, how much do you expect to flip it for? What’s your timeframe? Who do you plan to flip it to (primary homebuyer, another investor, etc.)? What contingencies do you have in place in case things don’t go exactly as expected? Get answers from this step-by-step guide to house flipping.

Knowing how you plan to get out of a property is almost as important as knowing how to get into a property. Your exit strategy will ultimately determine your profit. The more options for exit strategy you have in place, the better. For flipping properties, this primarily relates to how long you have to hold the property, which can be an issue with your financing and hold costs–and how much you are able to sell the property for after all is said and done. Sometimes things go totally as expected, other times they don’t. Have plans in place!

7. Does this property fit your goals?

What is your reason for buying an investment property and what is your reason for buying this investment property in particular?

Different real estate investing methods and different investment property types achieve different things. While financial gain is likely a common goal for all investors, the means to the financial gain can vary widely. You need to make sure those means fit your goals.

Some of those goals may include:

  • Short-term vs. long-term income
  • Active vs. passive income
  • Specific financial goals
  • Desired work levels
  • Desired risk levels

The more your investment property matches your goals, the more satisfaction you will feel from it and the more likely you are to succeed with it.

Residential vs Commercial properties

Residential vs Commercial properties

At Japan Property Investments we focus on the purchase of Residential properties rather than commercial property.

Residential property is a common investment type for many real estate investors. This often involves investors purchasing a property and recouping their investment via rental income (and potentially through increasing equity, if the housing market rises.)

Commercial property, on the other hand, tends to be either retail premises, offices, or industrial facilities (warehousing, factories and so on). Larger commercial properties are often owned by a collective of investors, rather than a sole trader, as the initial capital needed can be very high.

It is a simple strategy based on our expertise.

We understand the residential markets and have professionals that advise us in this area. With commercial property our experience is limited and we do not understand all the regulations around purchasing this type of real estate.

This is why we prefer to stay with residential property

Don’t mistake money for wealth

Don’t mistake money for wealth

I was talking to a friend recently about money and what makes us happy. He explained that the thing that brings his happiness is collecting toys. Yes, a grown man in his late 30’s explains that he greatest joy is collecting what many throw away. He believes that his estimated wealth from his toy collection is over half a million dollars

Money for most people money is an emotive, complicated subject. We all have different beliefs, motivations, emotions and preferences, which can make our relationship with it difficult. Money also influences how we view ourselves and can affect our feelings of self-esteem, control and security

For some people, other than paying for the basics, money is merely a measurement of their personal or business success. Others see it as a means of obtaining social status, often comparing their material wealth (house, car, clothes) to that of their peers and friends. Their personal motivation was very much about the outward appearance of success, even if they were not completely fulfilled and satisfied as a result

While this means money will make your life easier to a certain degree, if you let money own you it will make you miserable.

True wealth is what you are left with when they take all your money and properties away – your health, your family and friends, your knowledge and mindset, your spirituality and your ability to contribute to society.

True happiness comes from having a strong sense of purpose, being clear on your ideal lifestyle, and making work and spending decisions aligned with that vision. Life is far too short to waste time doing things you don’t enjoy.

There is always something to learn

There is always something to learn

Whether you are just starting out with property or you are already on your way to building a portfolio, educating yourself is the key to success. While it is possible to hire professionals to do most of the work, without some basic understand of how the process works it’s difficult to be successful

You don’t need to know everything but you must educate yourself in the basics to get started. A little education goes a long way in accomplishing four essential goals:

1. UNDERSTAND INVESTING AND REDUCE YOUR FEAR

Learning about real estate will demystify it for you, reducing your fear of the unknown. Without that fear, you’re more likely to take the steps necessary to progress to the next level and reach your goals.

2. KNOW THAT ORDINARY PEOPLE CAN BE SUCCESSFUL

Educating yourself will show you that you don’t need to have any innate real estate talent or know-how. You will see that anyone can do this. You don’t need a degree in law, finance or real estate, and you don’t need huge sums of cash. Ordinary people just like you, with ordinary reserves of cash, have achieved great results in real estate investment, and you can too!

3. CHOOSE AN AREA OF REAL ESTATE TO SPECIALIZE IN

By choosing an area within real estate to invest in will help you to narrow down and focus. When you understand some of the unique qualities of each type of real estate, you’re more likely to discover the type and location that best suit your investment style and needs. Different areas include residential, commercial, renovations or developing, just to name a few

4. IDENTIFY EXPERTS TO ASSIST WITH YOU INVESTMENT STRATEGY

Identifying experts might be best for your particular kind of investment strategy. When you assemble your team of advisors, one of them will be your real estate agent. He or she will be an expert in one particular sector—the one you’re investing in—but most likely won’t be an expert in other sectors. For example, he or she might specialize in duplexes, but not malls. By sticking with one sector, you can retain the same team of advisors without having to seek others. Where do you get that education? A good place to start is to read books, magazines and online articles on related topics. One resource will lead to another, and then another, and as you find yourself asking questions or wanting more information on a specific issue, it will guide you to the next article or book.

Japan’s stable rental market

Japan’s stable rental market

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Over the last several posts  we have highlight some of the reasons why investing in the Japanese property market can be positive. Real estate investing like any investment vehicle comes with risks but the risks in property can be difficult to control. Things such as rent not being paid, tenants not looking after the property, items in the house breaking down and needing to be repaired and other issues that can cause landlord’s headaches. In Japanese properties, these issues are often absent.

  • Japanese Tenants generally stay for several years allowing a steady source of rental income.
  • Tenants usually are very reliable in paying their rent on time.
  • Tenants are respectful to rental properties making sure the properties are kept clean and tidy. On vacating properties Japanese tenants will make sure the property is left the same as when they moved in
  • By western standards, Japanese units/houses tend to be very basic accommodation. Tenants are required to purchase all white goods and furniture themselves. This even includes ceiling light fittings and fans
  • Little protection for the renter at the end of the lease period.
  • At the beginning of a rental period the tenant must pay on average a deposit of 2 months rent. Deposits usually are non-negotiable as they are a refundable expense that is meant to cover any damages done to the apartment outside normal wear-and-tear
  • Another payment a tenant must make is called ‘Key money’ and is a throwback from the end of World War 2 when the country was rebuilding. It was a gift to the owner for allowing the tenants to live in the owner’s apartment. Although building has long since be completed, the `key money’ payment still exists and usually around 2 months rent
  • Other fees charged to tenants include cleaning fees and renewal fees.

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