How to Evaluate a Potential Real Estate Investment

If you’re considering buying real estate as an investment, you need to be as sure as you possibly can that it will pay off. Of course there are no guarantees in the investment game. However, there are a few things you can do that will increase your chances of making a real estate investment show a profit. Following are a few tips on how to evaluate a potential real estate investment.

Check Out the Seller
One of the first things you should consider doing is to do a background check on the property’s seller. Ask people who have done business with them in the past whether or not they were satisfied with the way they were treated. Did the seller deal honestly with them, or were they constantly catching them in a small distortion or enhancement of the truth? Was the seller available and willing to answer questions, or were they hard to get hold of? If the seller seems to be of good character, you will be able to negotiate with them easier.

Determine Profit Potential
The next step is to take a step back and look at the property with a realistic eye. You will need to evaluate whether or not the property will actually give you a return on your money, and if it does, will it be enough to justify tying up your money for an extended period of time. Consulting with a real estate or tax attorney, or an accountant, can help you decide if it’s worth the risk. Ask the seller what sort of income is generated by the property, and try and get a handle on how much the monthly expense will be. The difference will be your potential profit. Remember, these calculations are simply a ‘ball park’ estimate and your actual figures will more than likely differ. You will also have to figure out how much money you’ll have to borrow in order to purchase the property. After you’ve determined what your potential profit will be, you’ll have to decide if carrying the mortgage will leave you enough money to make the purchase worthwhile.

Does It Need Work?
In determining whether or not a potential investment property is worth the expenditure of money, you will have to take into consideration any repairs that may be needed. If the seller wants to transfer the property as is, you will need to find out if any work needs to be done immediately, or if the property is move in ready. If there is nothing significantly wrong with the property, but you’re not satisfied with how it looks, you may want to remodel, which will cost you more money. These types of costs will reduce your potential profit, at least immediately. It would be up to you whether or not you’re willing to carry the additional cost in the hope of turning a profit later on. It may be worth the expense to have a professional appraisal done.

Location, Location, Location
When considering a property as an investment, you should pay attention to the oldest saying in real estate: location, location, location. What this means is that where a property is located is extremely important. If you’re looking at a rental property–an individual residence or an apartment complex–that is located in a neighborhood that is in the process of changing over from residential to commercial, or vice versa, it could impact the future value of your proposed investment. The zoning laws could change and you could end up paying more in taxes than the present owner does and affect your potential profit. Doing a little research on the property and the neighborhood it’s located in could help you determine whether or not to make the deal.

Comps
As with any real estate deal, you should take the comps, or comparables, into consideration when making your decision. Comparables should be of the same size, age, and general condition as the property you’re considering. Comparing your property with the comps will help you determine if the property is worth the investment.

Think It Over
After you’ve done your research and considered all the pros and cons, you will need to make a decision. You should take your time doing so in order to ensure you’re not making a mistake. Caution is called for whenever you’re going to spend a great deal of money. It probably took you quite a while to accumulate the money and you want to be sure you’re making the right decision.

Guest post from Jean Clark. Jean writes for BackgroundCheck.org, a site that educates people about background checking procedures.

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