7 key factors to consider in an investment property

Are you considering co-buying a property for real estate investment? Understanding what to look for is crucial before diving into the search for an investment property. Given the financial commitment, securing the best value is essential, especially if you plan to turn the property into a long-term investment.

Here, we’ll explore seven key factors that could help ensure your real estate investment is sound.

1. It passes the 1% rule

When many co-buy a home, they have a goal: make some money from rental income. To see if the property you're considering is a worthwhile investment, use a quick method called the 1% rule to help you quickly determine a home's potential.

The 1% rule of real estate investing measures the price of the investment property against the gross income it will generate. For a potential investment to pass the 1% rule, its monthly rent must be equal to or no less than 1% of the purchase price.

Here's a quick example of a home with a purchase price of $200,000:

$200,000 x 0.01 = $2,000

Under the 1% rule, you should find a mortgage with a monthly payment of $2,000 or less and charge your tenants a minimum monthly rent of $2,000. If the property you're considering fails to pass the 1% test, continue your search for a more profitable rental property.

2. Potential for long-term profit 

The property's potential to yield substantial returns over time is a crucial aspect to consider. Understanding your financial outlay ensures the property generates positive cash flow to counter expenses, especially mortgage payments. Calculating prospective rental income aids in gauging post-purchase profitability and guiding budgetary considerations during your property search.

3. Location, location, location

Location is one of the most important factors when buying an investment property. Why? Because it's one of the only things you can't change.

Look for properties in high-demand areas, such as near universities, public transport, shopping centers, or schools. Also, aim for a property situated in a secure and reputable neighborhood. Prior research into the surrounding area is crucial before property acquisition, especially if planning to rent it out. Prioritizing tenants' safety as a property owner is paramount and contributes to attracting potential renters to a well-regarded neighborhood.

4. Well-maintained condition 

Evaluate the current condition of the investment property; a well-maintained property increases the likelihood of yielding a significant profit. Opt for newer and well-cared-for homes, saving on future maintenance costs and appealing to potential renters or buyers. A rundown property with potential maintenance issues may deter renters or prospective buyers.

The decision to purchase an older or newer property depends on your intentions. A fixer-upper might be suitable for flipping properties, but assessing the necessary renovation work is crucial.

5. Property Features

While you might not intend to inhabit the property yourself, it's essential to consider the needs of potential occupants. Consider amenities that typically attract people, such as a garage, extra bathrooms, or a dedicated home office space, as these can significantly enhance the property's rental value. Additionally, the property's layout and design play a crucial role. Does it prioritize practicality for daily living? Is there ample natural light? Tenants frequently seek these aspects, making them vital considerations before your purchase.

6. Low property taxes 

Ensure the property features low property taxes to minimize additional costs. High taxes can significantly impact the profitability of your investment. Researching property taxes by state provides insights into regions with lower tax burdens.

There are numerous resources to identify U.S. states where homeowners pay the most and least in property taxes. For 2023, the three least expensive states are Alabama, West Virginia, and Arkansas, while New Jersey, Connecticut, and New Hampshire are the three most expensive states.

7. Ease of maintenance 

Selecting an investment property that's easy to maintain simplifies ownership. Assess the regular maintenance tasks required, particularly if it might become your primary residence. Consider properties like townhouses or apartments that offer less exterior upkeep due to shared walls or are managed by property management companies. This alleviates the burden of outdoor maintenance tasks.

Discovering an investment property that aligns with your specific criteria requires patience and effort, yet the payoff for your thoroughness can be immensely satisfying. Although purchasing property entails a significant financial commitment, meticulous consideration of factors such as location, condition, and anticipated maintenance needs will aid in determining its viability as a sound investment.

Ready to embark on co-buying an investment property? Nestment can help you begin the adventure.