Buying investment property in Chicago is a great way to make additional income for you and your family. Different investors use different calculation methods to determine if an investment is right for them. Before you make any large investments, take into consideration our rules for buying investment property!
Location, Location, Location
Yes, this has been said before, but this is a huge factor when buying investment real estate. You can change ANYTHING about a home, aside from where it is built. You need to find a neighborhood where people want to be. A great house in a bad area isn’t going to get you the profits you are looking for. So what do you want to see in a location?
- Convenience. Most people will want to get to the grocery store in a reasonable amount of time.
- Low crime. You do not want to have to deal with vandalism, theft or dealing with bad tenants you might find in a high-crime area
- No main roads. Nobody wants to hear traffic noises all day, or have high traffic in front of their home where children might be playing.
- No commercial property nearby. Commercial properties encourage noise, traffic, litter and vandalism.
- Proximity to schools. You will need to find a sweet spot as far as distance. Families will want a quick commute for their kids, however, homes adjacent to a school will often have lower property values. This is due to more traffic and kids loitering in the area.
- Things to do. You can tell it’s a good neighborhood if you see parks, shops and restaurants nearby.
Know Your Numbers
Investing in real estate requires a solid understanding of the financial metrics that determine a property’s potential profitability. Different investors use various equations to assess whether a property is a good investment. One widely-used method is the capitalization rate, or “Cap Rate.” The Cap Rate is calculated by dividing your net income by the asset cost. For example, if you purchase a house for $150,000, rent it out for $1,000 per month, and incur $200 in monthly expenses, your net income would be $800 per month, or $9,600 per year. Dividing your annual net income ($9,600) by the purchase price ($150,000) gives you a Cap Rate of 6.4%. Setting clear investment goals is crucial, and if a property does not meet your target Cap Rate, it might be wise to consider other options.
Another common metric used by investors is the 1% rule. This guideline suggests that a rental property should generate monthly rental income equal to at least 1% of its purchase price. While this rule can vary depending on the local market, it provides a useful benchmark for evaluating the income potential of a property.
Additionally, some investors adhere to the 50/50 rule, which helps in budgeting for expenses. According to this rule, 50% of the rental income should be allocated to expenses other than the mortgage, such as repairs, property taxes, and management fees. This approach ensures that investors account for all potential costs and maintain a healthy cash flow.
Don’t Get In Over Your Head
Real estate investing, particularly property flipping, can be enticing due to its potential for high returns and its portrayal in popular media. However, successful investment requires more than enthusiasm and a basic understanding of the market. If you lack experience in rehabbing homes, it’s crucial to avoid properties that require extensive repairs. Hiring a professional inspector can help identify hidden issues that could lead to costly surprises. Discovering multiple unforeseen problems when attempting to fix a single issue can derail your investment plans and strain your budget.
Working with a knowledgeable and like-minded team is essential for novice investors. Partnering with experienced professionals in the industry can provide valuable insights and support, helping you navigate the complexities of property investment. Surrounding yourself with a reliable team can increase your chances of success and help you grow as an investor.
Avoiding Costly Mistakes
Investing in real estate, especially property flipping, requires careful planning and a realistic understanding of the challenges involved. Many novice investors are drawn to the idea of flipping homes due to its portrayal as a quick and exciting way to make money. However, the reality is that successful property flipping requires experience, knowledge, and a strong support network.
If you are new to real estate investing, it’s crucial to start with properties that require minimal repairs. Avoid homes with significant structural issues or hidden damage, as these can quickly escalate costs and complicate the renovation process. Conducting thorough inspections and working with trusted professionals can help you identify potential problems before making a purchase.
Building a reliable team of experts, including contractors, real estate agents, and property managers, can provide invaluable support and guidance. Experienced professionals can help you navigate the complexities of property investment, offer practical advice, and share their knowledge to help you succeed.
Successful real estate investing requires a deep understanding of key financial metrics and a cautious approach to property selection. By using tools like the Cap Rate, 1% rule, and 50/50 rule, investors can make informed decisions and evaluate the potential profitability of a property. Avoiding properties with extensive repair needs and building a strong support network can further enhance your chances of success. Whether you are a seasoned investor or just starting, these strategies can help you achieve your investment goals and build a profitable real estate portfolio.