Risk vs Reward
Purchasing Residential Investment Property
When considering purchasing your first investment property many new investors are captivated by the possibility of really high returns on initial investment. I refer to this as the Magpie Syndrome where investors are attracted by shiny baubles (coins) and high returns without realizing the risks involved in owning property in riskier neighborhoods where there is high crime, high risk of vandalism, high risk of tenants not paying their rent and even not being able to rent the property because of the neighborhood.
A few things to keep in mind when weighing risks and rewards are:
Local Laws - This is really crucial when starting. Some areas are not investor friendly and the local government tries it's best to discourage investing. You'll also want to become familiar with health and safety and licensing regulations in the area you are considering.
Population density and demographics – the number of renters vs home owners in the neighborhood and any future changes. Some neighborhoods might appear risky at first but there may be a steady stream of rental prospects based on community demographics.
Education Standards – Be sure to check not just the elementary but also the middle and high school statistics in the area you are considering. Keep in mind that most of Baltimore City and County has converted to the Magnet program but not all schools in Baltimore County participate so you’ll want to know that.
Access to Transportation – This could be important if your rental property is in a neighborhood where tenants might need to access bus or light rail to get to and from work. If you purchase property closer to Washington DC having a property close to public transit is a very valuable consideration for prospective tenants.
Bedrooms and Bathrooms - I would never recommend buying anything less than a 3 bedroom home for an investment unless there is demand for less. People will rent a 3 bedroom if they only need 2 bedrooms but there are more prospective tenants that need 3 bedrooms. Also keep in mind your exit strategy too.
Financing - How are you going to purchase your property? You'll want to be sure to ask your Realtor for a referral to a good lender that is experienced in financing investment real estate, reading spread sheets and tax returns. This becomes even more important with each additional property you purchase.
Exit Strategy – Always begin with the end in mind. What are your short, medium and long term goals? Are you saving for college? Putting your kids through college? Saving for retirement? How long do you plan to hold these properties and how do you plan to dispose of them and are you buying for income from rent or income from appreciation or both?
It’s very important for new investors to do their homework and weigh the risks and be sure to enlist the aid of an experienced real estate professional who is familiar with analyzing risks as well as property values. Sometimes, it is better to take a lower return on investment to have a great long term investment rather than the short term higher gain in a riskier neighborhood.
I am an experienced Certified Investor Agent Specialist and I own investment property and have renovated and resold property for investment. I have helped many new and experienced investors realize gains from owning real estate. I can help you too.
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