When it comes to real estate investing, curiosity didn't kill the cat. A lack of it did.
Asking the right real estate investment questions is one of the many stepping stones in your investing journey, that paves the way towards success and financial freedom. Without them, you will be left without a full scope and understanding of a prospective property's potential, performance, and risk.
We are sharing the seven questions you should be asking a real estate agent before investing.
Why is the owner selling?
While a majority of owner selling reasons may be impartial to you, like retiring or moving across country, the remaining reasons can have a direct impact on your investment's performance. If they are selling because of a problem with the property or with the area it is in, like a decreasing demand for rentals, that is definitely something you will want to be made aware of before going through with the sale.
Two red flags to be on the lookout for: 1.) If the owner is selling the property shortly after purchase, and 2.) If the property has a history of frequent owner turnover. These "quick sales" usually indicate that previous owners are discovering major issues and costly repairs that they were not willing to put the time and money into fixing. This can include roof replacements, faulty wiring, or a semi-functioning heating and cooling system. Cha-ching. You'll be spending big bucks well before any cash flow to compensate comes in.
What is the neighborhood and building vacancy rate?
Knowing the vacancy rate of the property and neighborhood helps you make projections on if your investment will return a profit at its current rate, OR if you need to develop a plan on how to lower the vacancy rate to return a profit.
The vacancy rates of different property types provide different insights. Vacancy of multi-family units has a higher impact on the fluctuating overhead costs and operating expenses including the cost of utilities, maintenance estimations, and liabilities. You'll want to make sure that the estimated incoming tenant rent covers these costs while still putting extra cash in your pocket. Single-family unit vacancy rates speak more to the neighborhood performance than the property itself. They provide insight into how quickly you can fill the vacancy and what the overall market trends are in the area. For example, a high vacancy rate can mean demand for rentals in the area is low.
How transitory is the neighborhood?
Similarly to the vacancy rate, the more frequent the tenant turnover, the higher the amount of work and expenses for landlords. While turnover is the name of the game for short-term rentals and Airbnbs, high turnover rates bleed profits for long-term rental investments. Asking this real estate investment question can help narrow down your investing strategy and your target renter base. Will you want to cater to families looking to establish roots, or young professionals on the move?
What's the properties tax bill, and will it change when I buy the rental property?
Year in and year out, property taxes are a significant expense for all home owners and real estate investors. Your property tax bill is based on the assessed value of the property, usually done annually, semi-annually, or upon property transfer. Factors like property size, location, age, and property use all affect the property assessment, and therefore, the tax bill. So if the property sees a change on one of those factors or is bought at a price higher than the assessment rate, you could see a higher tax bill than in the past. The bright side to this concept is that it is highly localized, easy to calculate with a few crunched numbers, and — if necessary — available for reassessment.
A real estate investment plan does not anticipate a surprise tax bill increase after buying the property. Research does.
Which direction are mortgages and rents trending?
Our Economic Forecast of 2022 shows mortgage rates — and overall inflation — are going up. This means, the sooner you get financing and invest in real estate, the better. As an investor, you will also need to look at what incoming rents are doing — increasing, decreasing, or stalling. A resourceful tool to assess this is using rental comps.
For my Minneapolis and St. Paul investors, another element that will be crucial to keep your eye on will be the new Twin Cities Rent Control Policies coming into effect this year.
When were the roof, furnace, AC unit, and hot water heater each last replaced?
In addition to checking the components with longer lifespans — framing, wiring, plumbing, etc. — and noting obvious cosmetic updates, you will want to look into the history of the important and frequently used property operators. The roof, heating and cooling systems, hot water heater, and water softener can be expensive to replace, especially in initial stages of investment ownership, a.k.a. before you've built an emergency nest egg or have seen any positive cash flow. A real estate agent can provide a specific replacement timeline and verified documentation that sometimes the seller lacks. An outsourced home inspection can provide more detail on all components that make up the property's structure and can make or break your real estate investment bank.
Check out this quick-reference infographic that shows how long each internal and external component of your property should last (provided by SparkRental).
Which risks am I taking on?
Finally, if none of the previous real estate investment questions exposed any risks — both manageable and unmanageable — with the property, it is smart to lean on your trusted real estate agent’s experience and ask them point blank if there are any risks you’re not seeing.
Because two eyes are better than one — sorry Mike Wazowski — joining forces with an expert in the real estate field, or any field for that matter, is always a good idea. Talk with one of our experts today on how we can help make your real estate investing dreams come true and download our Investment Real Estate Guide.
