House Talk: What to look for when you buy an investment property

There are quite a bit of questions that come up when we tell someone we’re into flipping houses. The most common misconception I hear most frequently is that you can “just flip any house for a profit.” This could not be anymore untrue! It doesn’t really help much when you see people on TV going into the worst of the worst properties and coming out with a bigger than big paycheck at closing with ease.

There are about 18,500 items we cross off our list when we get into the market each year for a new project, but today I want to share 5 of the most important things we look for from the start. These 5 things have dealt us a good hand up to this point, so I feel like they’re pretty valid points to share with you from our experience. If you’ve ever considered buying an investment property (or any home for that matter) for yourself, definitely check out this list before you buy!

1) LOCATION (“location, location, location”)

I can’t stress this enough which is all the reason I placed it in the #1 spot on this list. Always remember location is THE most important factor when you’re looking to purchase an investment property. WHY is it so important? It’s literally everything when it comes to re-sale. It’s the reason why your buyers are buying where they’re buying. It’s HUGE when it comes to comps to look for and it’s the determining factor into where we look in the neighborhoods we do. If you buy a property in a run down area and have next to nothing sales surrounding it, you’re looking at a next to never chance that you’ll be selling that home anytime soon. Now, hear me when I say that I 100% believe that there is a buyer for every house. Trust me, even if it takes 5 years to sell–someone, somewhere will buy that house. But, also hear me when I say that if you’re looking to make profit quickly and earn the money you put into that home with your blood, sweat and tears in the process, you’re going to want to make sure you’re buying in a good area. What do I mean when I say “good” area?

Here’s what we look for when we’re deciding on where we want to flip:

Neighborhood–what do the surrounding houses look like? Are they kept up? What kind of activity goes on at night there or on the weekend? Are there kids running around playing or waiting for the school bus in the morning? What school district is the property in? How’s that school district fare in comparison to others in the area? Does there seem to be a community within the neighborhood from what you can tell from the outside looking in? What kind of cars are around? Have you heard of this neighborhood before in conversation? Do you know anyone who lives there? Have you heard of crime in the area? How close is it to local grocery stores? How about the interstate? Are there apartments surrounding the neighborhood? Are there people out walking/running along the sidewalks? Does it feel safe? Is it well lit at night? Is it on a busy street? Is it in a hilly area? How’s the drive way?

These are ALL questions we consider when we’re looking at a certain neighborhood to potential flip in. Yes, they’re all judging a book by it’s cover, and that’s exactly the entire point of buying an investment property. It’s judgmental, but it’s looking at the entire picture with a clear view of where you’re putting your money into. You HAVE to keep this in the front of your mind at all times! I could go on and on all day about why this is so vital in the process, but just trust me when I say–location is EVERYTHING. Do your homework when it comes to looking where you’re buying. This goes with buying any home really, but especially one that you’re looking to earn a profit from.

2) Price

You’re thinking, “well, duh“, right?Well, you’d be surprised at the prices that some people get locked into when they’re buying an investment property without previous experience and come out empty handed. But, there are a few key things to remember when it comes to locking in your purchase price of an investment property. Is this home you’re looking at a foreclosure? Is it an estate? Is it something that is priced right according to the neighborhood or below market due to it’s condition? What is the room for the budget depending on what you can get it for?

So, I won’t dive into foreclosures drastically here because that’s for a whole other post, but foreclosures can tend to be where the money’s at in investment properties. Saying that, buying a foreclosured home is a VERY tricky thing. Why? Well, you’re buying a home with ZERO, (and I mean ZERO), disclosure on the condition. This is where your trusty inspector will come in to save the day here (I should say “most of the day”, not all 24 hours of it though, if you know what I mean.) Banks don’t disclose what they know about these homes (because they didn’t live in it like the actual owner did) therefore they can’t tell you the history of what has happened behind those walls. In your average residential detached home sale, sellers are required to share a property disclosure with the buyer with all of the details of what’s happened since they’ve owned the home. This is where you’ll find out if they’ve had any major damage, major repairs done, who their utilities are through and all that fun stuff! But, with a foreclosed home–you get none of that. It’s all up to you, and you basically have to cross your fingers and know what you’re getting yourself into as best as you can before you sign on that dotted line. However, these are usually priced significantly lower than your average “fixer upper” property because the bank wants it off their hands ASAP to earn their money back. This is when your budget has room to wiggle and you have a higher profit in the end (depending on the condition of the home.) We’ve had good luck with our previous foreclosures, but they’re nothing to sneeze at when it comes to major cosmetic repairs as they come pretty run down and in need of TLC.

Now, if you’re looking at a standard residential home that is NOT a foreclosure but is just in need of some cosmetic updating–you’re most likely going to be paying a little higher when it comes to the asking price. This is where your comps will really come into play. I’ll dive into that topic next! But, with this, you just want to consider what neighborhood you’re buying in and what reasoning you think the seller decided to price the house for to begin with. There are instances where the seller is elderly and is just looking to get the home off their hands but has no budget to fix what needs to be done. That’s where you come into play, Mr. Investor! We’ve been lucky to find a few of these ourselves.

Lastly, keep in mind when you’re agreeing on the price or even looking at the ask price–what your repair budget will look like if you get locked into an agreement. Don’t forget you will have to pay real estate fees on closing when you sell, repairs that come up on inspection day, termite fees, and all the other fun bills that come along with owning a home. Your budget is something that needs to be pretty set in stone beforehand, but you have to understand that things can and DO come up and change the budget figures by the end of the process. But, bring a pen and paper for your showing and write down what things you think will need to be updated and then work on quotes to get a good idea of what you can expect to pay, repair wise.

3) Comparables

This is another HUGE factor when it comes to buying an investment property. You have to do your homework when it comes to looking at what the homes in the surrounding neighborhood are selling for when you’re buying this investment property. You need to know this for two reasons: 1) You’ll need to know this for when you’re buying to determine if you’re getting a good and fair deal. (There’s also the appraisal that comes in HUGE for this which helps a ton!) and 2) You need to know the comps of surrounding homes and what they’re going for so that you know what you can potential sell this home for when your work is done. (I.E. will you get a paycheck or not.) If you’re unsure of how to figure out what homes are going for, do NOT look at Zillow. Contact your real estate agent for their professional expertise in this area. Honestly, in my opinion, you shouldn’t be buying the property if you don’t know the comparable information in it’s entirety. It’s THAT important in determining whether you should buy or not and if it’s worth your effort/money/time. You need to know what homes are going for per square foot, how long they sit on the market and what they’re actual selling and CLOSING for. You don’t just need to know their list price because that does you no good.

4) Condition of the home

Like I mentioned in #2, your inspector will become your new best friend as their opinions are vital in buying an investment property. While they can’t look behind the walls, they can tell you some very important information before you sign on the dotted line to purchase. As we’ve bought and looked at quite a few at this point, Nick has become so familiar with everything they look for that he does a pre-inspection before we even have a contract agreed upon up front. You become very familiar, pretty quickly, with what matters and what doesn’t when you’re into flipping. Also, like I mentioned beforehand, if you’re purchasing a foreclosure, the condition of the home will most likely be in pretty rough shape. That doesn’t mean it’s not a good buy though, all cases vary depending on your budget/experience. You do want to start a running list of the huge factors to look for when it comes to a first glance as to if the home has potential or not.

Here are a some major factors we look at when it comes to the condition of the home:

Any foundation issues? Does the A/C or furnace kick on? What’s the age on those? Are they heating/cooling as they should? Any major upfront damage you can see to the naked eye? How’s the roof look? Any rotting to the exterior? What is the exterior–wood, brick, siding? Any cracking to the corners of the doors on the inside of the home? Any water damage or leaks that you can see? Does the flooring have any leveling issues? Does it feel sturdy? Does it have any strange smells? (HUGE). Does it have any signs of mold? If the house isn’t winterized, does the plumbing seem okay from what you can see with the naked eye? Do the doors have trouble opening or do you notice settling? Is the house in a flood zone? Are the windows fairly new?

There are a ton of other factors that come into play when it comes to the condition, but these are all things that come to mind for us as we look around at properties. You have to be very cautious of the major repair items because you don’t want it to come back and bite you in the butt once you purchase the home and have repair after repair burying your potential profit. Not everything is predictable of course, but you want to get a pretty good idea of what you’re walking into.

5) Layout

This is another one that I can’t stress enough. You have to know upfront whether the layout is going to work for you or not down the road. Now, depending on the work you’re able to do or are capable of paying to have done–the layout can be changed in some ways. You’ve seen people knock down walls and re-arrange bathrooms and things, but it’s not necessarily the ideal choice when it comes to getting the best bang for your buck in the end. It can be very costly to have major walls knocked down, especially when they’re load bearing (I.e. carry some of the weight of the home). But, sometimes it pays off in a major way and can open things up into a whole new space! This is exactly what we’ve done in our current flip with knocking out a portion of a wall to open the dining room up into the kitchen. The flow of the house is so important to us and we usually know instantly whether we like it or not upon first impression. We like for rooms to make sense and the space to be open and airy which tends to be what a majority of people look for when they’re buying as well. I also like to gauge this by if I can remember the layout of the home when we leave the showing. Sometimes, when we walk out I can’t remember where any of the rooms were or where the kitchen or bathrooms were because it was just way too confusing. But, if I can remember exactly how it went–that’s usually a good sign it has a good layout! We’ve been insanely lucky with every single house we’ve had so far to all have really good flowing layouts! We just feel like the buyer will know instantly, just like we do, if the house flow will work for them or not. And of course, we definitely want it to work for them!

There you have it, our 5 best tips for buying an investment property! I know it’s kind of overwhelming and seems like a ton of information, but it all starts making a lot more sense once you get into the actual process of looking to buy. You start developing a list in your head with factors that matter and eventually it becomes pretty easy to spot what and where you would buy or not. We’re always learning and adding things to our list of what to look for, so we’re not saying we’ve got it all figured out by any means. That’s the name of the game when it comes to real estate, which is that it’s constantly changing! But, I feel like these are all things that come into play for us and maybe it could help trigger a few things for you too if you’re ever in the market for your own investment property! You can honestly use this list for buying any home in the end, because no matter what, your money is on the line and you want to make a good purchase.

Stay tuned for our how-to’s starting up later this month! I’ve got quite the running list going of our DIY projects! It’s going to be fun!

Questions for YOU today: (Comment below with your thoughts!)

Have you ever considering getting into flipping houses?

Have you ever owned a home before?

What’s the craziest thing you’ve come across when shopping for houses before?

We’ve seen some pretty interesting things before, so my list may not count. But, let’s just say foreclosures have some very major quirks to them that rarely seem to make sense….

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