There’s a lot about real estate investing to make it attractive to investors, including residual income, value appreciation, and the security that comes with owning hard assets. But the other side of that coin is that real estate investing can be hard to break into sometimes. It can be fairly capital-intensive owing to more-rigorous lending standards and the necessary high down payments (sometimes as high as 40%).
So it’s important to choose investment properties wisely and carefully. Here are five important things to look at when buying your first investment property in California – many of which have more to do with attendant conditions than the property itself.
What To Look For When Buying Your First Investment Property in California
1. Repair/Renovation Issues
Certainly, the first thing you’ll want to consider is the condition of the property. A fixer-upper can often be a great bargain with a lot potential for ROI – if, that is, the needed repairs and renovations are fairly minor. If the property has major structural issues or requires mold or asbestos abatement, you may want to reconsider. You simply can’t invest more in the property than you can get back out of it.
Beyond the property’s condition, the next important consideration in buying your first investment property in California is the neighborhood. The quality of the neighborhood will not only affect appreciation potential but will also determine in large part the quality of tenants and vacancy rates. If the property seems at first glance to be a stunning bargain, but then you can’t get quality, long-term tenants, then it’s no bargain at all – and maybe even a liability.
If the property you’re considering is intended for family occupancy, the quality of the local school system will be an important consideration for both buyers and tenants. So if there are no nearby schools or they are poor quality, the property is most likely not a good investment. The quality of the schools (like the neighborhood) will affect the property’s appreciation. And although it may produce a good cash flow in rents, it may not fetch the price you need when it comes time to sell it.
4. Property Taxes
In general, lower property taxes are better when buying your first investment property in California – but not always. As a real estate investor, you will certainly need to be aware of how much income you’ll lose to property taxes. Still, that’s not the whole story.
If, for example, the property is located in a great neighborhood that attracts quality tenants and commands higher rents, high taxes will be more than made up for. In that case, it’s just a run-of-the-mill business expense you will absorb in the course of reaping greater profits.
If, on the other hand, taxes are low because the property is located in a poor neighborhood or a high crime area, you won’t really be saving money on lower taxes. It will be harder to attract good tenants or sell the property at a decent price.
5. Local Rents
Another important consideration for buying your first investment property in California is local rents (if you intend to rent it). You need to know what the average rent is in the area for comparable properties to determine whether rent will cover mortgage payments and other expense with enough left over to justify the investment.
You also need to consider the longer-term outlook. Potential rent may be sufficient right now, but what if the neighborhood is on the decline or property taxes are likely to increase significantly? So take the time to consider what the area – and rents – will be like five years from now.
Investing in real estate can definitely be a solid long-term earning investment – if you know what to look for when buying your first investment property in California. We would welcome the opportunity to help you achieve your real estate investing goals.