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Investment Property Part 2 of 2: What You Need to Know Before You Buy

Welcome to the second portion of a two-part series on investment property. In the first installment, "How Not to Become a Slumlord", we discussed a little of what it takes to own and operate a property as well as some of the do's and don'ts of the property management trade. In this second segment, we will be discussing some pre-investment principles that will help you maximize your ROI.

There are three basic principles of investment property that you should know before you buy an investment property in order to avoid overpaying:

Time
How long do you plan on owning the investment property? As with stocks and bonds, the value of your investment may change significantly during the time you own it. While most real estate will appreciate in value over time, there are frequent fluctuations in the short-term market. If you plan on selling your investment property after less than five years, be prepared to accept the investment risk inherent in a shorter time horizon. This is especially true if you bought your property in an overheated real estate market. If this is the case, you could find yourself losing money if the market has taken a temporary downturn, especially if you've had to make major repairs to the property.

If you plan on owning the property for the next twenty to twenty-five years, it's almost certain that your investment property will appreciate in value. There's also a good chance, however, that you'll have to make major repairs like replacing the roof, wiring system, or major appliances like a water heater or refrigerator. Of course, these repairs will be offset by the fact that you've had/will have twenty plus years to recoup the cost. If on the other hand, you're only planning on owning an investment property for the next five years, buying a "fixer up'er" can eat up all the profits you would have made during your shorter investment horizon.

Networking
If you want the best deal possible on an investment property, than there are some people you'll want to be friends with. City hall clerks and bank employees may know what properties will be available on foreclosure and when they will go on the market. Real estate agents usually know everything real estate related within their respective territory. Some prospective landlords even run ads in local newspapers.

Many individuals interested in entering the investment property market may even join local landlord or investment property owners organizations. These types of organizations hold regular meetings where you can get the inside scoop on what's for sale in your area. The National Real Estate Investors Association is an online organization that provides a wealth of information and resources to potential investment property owners.

Financial Preparation
Get your finances in order. The less debt you have when you walk into your local lending institution, the better loan you'll get. This is common sense, but it's even more true for those seeking financing for an investment property. This is because lenders know that people are much more likely to default on a rental property than on their own homes. This means that the bank will demand a larger down payment and higher interest rates that you may have expected. It's also a good idea to have some extra cash left over to make unforeseen repairs should they arise.

By wisely choosing an investment property time horizon, making contacts in the investment property community, and preparing proper financial means, your investment may become a significant means of supplementing retirement and other savings accounts.