Are you thinking about diversifying your investment portfolio with real estate? Perform a thorough real estate portfolio analysis beforehand to evaluate your investment potential.
Diversifying your investment portfolio to include real estate is a good way to hedge losses caused by a downturn in the economy. With real estate, you will always have the physical value of the property, a tangibility that paper investments sometimes lack. Real estate properties almost never lose their value completely.
However, not all properties are worth the asking price. Take the time to dispassionately evaluate a potential real estate investment before you write a check or sign papers. You may need to hire a professional real estate consultant as you make your real estate portfolio analysis.
What to Consider During a Real Estate Portfolio Analysis
Are you qualified for financing? The qualifications for buying a property as an investment differ from those for a personal residence purchase. Because this property will be a source of income, you will be taxed differently, and your lender will adjust their requirements to accommodate that discrepancy.
You will most likely need around 20-25% of the sale price as a down payment as insurance that you can afford the property. Lenders usually require a debt-to-income ratio of less than 45% for investment real estate purchases. Of course, other factors also come into play, such as your other assets, your cash reserves, and your credit score.
First-time real estate investors will find it difficult to use their prospective rental income to qualify for financing, even if the property is currently rented. Most lenders want to see a proven track record of managing such properties before they will consider this a valid type of income.
Do you have a business plan for the property? Will you be renting your property or flipping it for profit? Owning rental property requires more than just purchasing the building. You need to be available (or hire someone to be available) for repairs, for showing the property, and to address tenant complaints.
If you are purchasing a property to renovate and sell for profit, have the property assessed by a professional real estate appraiser and a property inspector to ensure that there are no hidden complications. A sinking foundation, faulty wiring, or termites are much more expensive to fix than landscaping and chipped paint and can cut significantly into your profits.
Are you familiar with the property’s neighborhood? “Location, location, location” is more than just a real estate cliché. The location of your investment property is one of the prime determinants of its worth. An undesirable neighborhood can make your property harder to rent or sell and can drive away potential customers.
An appraiser can help give you insight into a specific location’s value during your real estate portfolio evaluation. Ask your appraiser about the up and coming neighborhoods in your area. That may be a good place to start your investment search.
While investing in real estate can be a great way to add an extra layer of security to your investment portfolio, not all investment properties are created equal. To make sure that you invest your money wisely, take time perform a little real estate portfolio analysis. Look at the potential property’s neighborhood, evaluate your financing options and devise a business plan for managing your property.
For a professional real estate portfolio evaluation, contact Ferstl Valuation Services at 501.313.0641 to schedule a consultation.