So, you have decided to make the biggest financial decision of your whole life by buying an investment property. However, you have concerns about the legal issues that others have had in recent years. Maybe the property is underwater, or the rental income doesn?t cover all of the expenses associated with the property, or maybe the mortgage payments have become unaffordable.
You aren?t alone. Even though those issues are there when buying investment property, there are many more. Despite the fact that these issues have been around forever, it is only recently that buyers have been getting better about doing their due diligence and taking the time to work hard to lower the risk on real estate. The process is really not that complicated, but it is time consuming. The following is a list of things that should be on your due diligence list to lessen the chance of something going wrong with your investment.
Understanding the Purchase Process
A buyer should have a complete understanding of the purchase process right from the beginning. Review the contract as early as possible before you sign it. Make sure you understand how to shop for the right property, make sure you know about making an offer, contingencies, appraisals, financing a mortgage, and when the earnest money deposit becomes ?at risk?.
Does it Make Sense Financially?
Start by jotting down the deal. You need to determine the amount of cash you will invest and what rate of return you project to be earning. Bank CD?s pay 1%, Bonds pay 5%, while real estate is riskier. So what should you be earning? Five percent is the suggested amount. Farther down the road appreciation value may come up, and it will most certainly help, but let?s count the cash first.
What about buying vs renting? There are a few simple guidelines to consider. If you plan to own for less than five years, you should keep renting. You will not be throwing away money and it will be less stressful. Buying for the long term is the best move you could make. And don?t buy just anything to be buying something ? buy the property you fall in love with that will make you happy in the long run.
Be a Smart Shopper
Are you hoping to grab a deal of a lifetime on a foreclosure or short sale? If you are after a great deal at an auction, it only wastes your time and energy chasing something that has little chance of success. Skip past the get-rich-quick schemes. Go with a more conservative approach and shop for a traditional sale.
Income and Real Estate Taxes
If you are buying to save money on your taxes, you should know that many couples guying under $300,000 get little in tax savings. People with a higher income and more expensive property get the bigger tax benefits. Meet with your CPA or an experienced real estate attorney to determine if there are any tax benefits you can earn.
Getting a Fair Deal Financing Your Mortgage
If you can get financing, it has become easier to get a fair deal because of the new federal regulations. Even so, you should understand your Good Faith Estimate and how to take it apart to make sure you get that fair deal. Mortgages are long term, so take the time necessary to talk to a couple of different lenders, understand your mortgage, and make a good decision.
Homeowners Association (HOA)
This is an item that most buyers don?t know to review. The finances and the operation of an HOA are becoming a huge risk issue these days. If you don?t take the time to review them and understand them, you may get a big surprise in the form of drastically higher fees or special assessments in the years to come. Meet with someone that can help you decipher them. A qualified real estate attorney can help you with that. The ultimate goal is to avoid a community where the HOA is in really bad shape.
Fix Up Costs and Home Inspections
One of the most important things you can do as a buyer is to have a home inspection done. During this process, you should be putting together a list of what needs to be fixed and/or replaced. You can then take your list to a home improvement store and get an idea of the total cost of bring the property up to your standards. This will also help you to negotiate and seller?s credits and/or terminate the deal if the costs are too high.
Title Issues and Lot Lines
This is another item people tend to neglect paying attention to. Even though the risk of an issue is very low, the loss potential is huge. Take the time to review your title abstract and the plat or survey of the property, then take a walk around the property. It could save you endless financial stress in the long term.
If you take the time to learn the risk issues and do your due diligence before you purchase property, you can greatly reduce your risk of something going wrong. While it can be a lot of hard work, it will be much easier than trying to straighten out a big mess after you close the deal.