{"id":144141,"date":"2022-08-09T09:55:08","date_gmt":"2022-08-09T15:55:08","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=144141"},"modified":"2023-08-08T14:25:34","modified_gmt":"2023-08-08T20:25:34","slug":"questions-to-ask-before-buying-an-investment-property","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/questions-to-ask-before-buying-an-investment-property","title":{"rendered":"3 Critical Questions to Ask Yourself Before Buying An Investment Property"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC3743501140&#038;light=false\" width=\"100%\"><\/iframe>  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">Investors often purchase an investment property without having a solid handle on exactly how or if&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/rental-property-makes-money\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">it will be profitable<\/span><\/a><span data-preserver-spaces=\"true\">. To be fair, none of us were given instruction manuals when we started learning how to invest, so it makes sense that so many people dive in without fully grasping the fundamentals of determining whether a property will become profitable or not.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Adding to the problem of not having an instruction manual, we also don\u2019t know what we don\u2019t know, which makes it hard to succeed with a property.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Fortunately, while the information can feel abstract, there are simple things you can learn that will greatly help you increase your chances of success with a property you\u2019ve been eyeballing as a possible investment.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Whether you\u2019re buying a rental property, flipping, or investing in a commercial building, no matter what strategy you\u2019re using, there are three questions you can ask yourself that may dramatically change the fate of your investment.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Before you learn the three questions, I want to clarify two specific instances where you should apply this checklist of questions:<\/span><\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">With your real estate investment strategy<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">With each specific property you consider<\/span><\/li>\n<\/ol>\n\n\n\n<p><span data-preserver-spaces=\"true\">If you can answer each of these three questions as you begin to pursue an investment strategy, you will be in a much stronger position to better understand what properties to focus on and how to manage your overall investing experience in a way where you secure your chance for success with it. Then, when you begin to shop for properties, ask yourself each of these questions to help ensure that the property will do its best to support your success.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Now, get ready to take notes and keep these questions on hand to use them every time you\u2019re about to say yes to an investment.<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong><span data-preserver-spaces=\"true\">Question #1:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">How do I plan to profit?<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Question #2:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">What are the specific risks involved?<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Question #3:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;What specific risk mitigations can I implement to minimize risk?<\/span><\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\">Now that you have those written down, I\u2019m going to help you better understand each one and how best to answer it.<\/span><\/p>\n\n\n\n<p><em>Looking for a real estate agent? <a href=\"https:\/\/www.biggerpockets.com\/agent\/match\" target=\"_blank\">Quickly match with an investor-friendly real estate agent<\/a> who can help you find, analyze, and close your next deal.<\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Question #1: How Do I Plan to Profit?<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">This is a common place for new investors to falter. Too often, I see people dive into an investment without having a thorough understanding of how they expect to profit from it.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">On the strategy side, it\u2019s easy to have a general understanding of the process, but not understanding the intricacies of a process can create some gaps in the path to success.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For example, say you want to be a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/guides\/brrrr-method\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">BRRRR investor<\/span><\/a><span data-preserver-spaces=\"true\">. The process is spelled out in the name:&nbsp;<\/span><strong><span data-preserver-spaces=\"true\">B<\/span><\/strong><span data-preserver-spaces=\"true\">uy \u2013&nbsp;<\/span><strong><span data-preserver-spaces=\"true\">R<\/span><\/strong><span data-preserver-spaces=\"true\">ehab \u2013&nbsp;<\/span><strong><span data-preserver-spaces=\"true\">R<\/span><\/strong><span data-preserver-spaces=\"true\">ent \u2013&nbsp;<\/span><strong><span data-preserver-spaces=\"true\">R<\/span><\/strong><span data-preserver-spaces=\"true\">efinance \u2013&nbsp;<\/span><strong><span data-preserver-spaces=\"true\">R<\/span><\/strong><span data-preserver-spaces=\"true\">epeat. That\u2019s pretty easy to understand. BRRRR means BRRRR. But how do you conduct each of those steps in a way that will achieve a profit?&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Using this example, ask yourself what makes for a successful BRRRR versus an&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/brrrr-risks\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">unsuccessful BRRRR<\/span><\/a><span data-preserver-spaces=\"true\">. You\u2019ll need to understand exactly what needs to happen or what needs to be in place during each of those steps to create a profitable investment compared to one that will end up costing you money.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Similarly, when looking at prospective properties to purchase within your strategy, you must again understand the specifics of the process rather than just the basic process.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For example, say you want to buy a rental property. Rental properties are pretty straightforward: buy a property, collect rent from the tenant, keep what\u2019s left over after the expenses, and collect appreciation along the way.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Generally speaking, that\u2019s precisely how a rental property profits. But what do you need to know about each step to ensure you set yourself up for a profit?&nbsp;<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">What price do you need to buy a property for it to be profitable?<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">How do you run the numbers to determine the cash flow?<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">When should you expect to gain from appreciation, and how much? What if appreciation doesn\u2019t happen? Will you still be profitable?<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">How do you know if you\u2019re getting a good deal?<\/span><\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\">Those are examples of a more detailed level of understanding you will need if you expect to know how to profit from a rental property.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">When thinking about being able to explain how you expect to profit from a particular real estate investment strategy or from a specific property that fits into that strategy, treat it like you need to convince someone it\u2019s going to be profitable. When you have to convince someone of something, you use more knowledgeable and concrete facts to help better your argument. In the case of investing, assume you are one of those people who needs to be convinced of the deal and give yourself all of those answers!<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Question #2: What are the Specific Risks Involved?<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">You can run numbers and understand the detailed specifics of how an investment will be profitable all day long, but at the end of the day, none of those things matter if a major risk factor comes into play and wipes your profit clean off the table.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For example, you plan to flip a property. You\u2019ve run all the numbers, bought the property, and the contractors head in to start the rehab work. Suddenly, there\u2019s an unexpected foundation issue that will cost an additional $30,000 to fix (and it\u2019s so bad that you can\u2019t avoid fixing it). Now, you\u2019re $30,000 over budget, and maybe you were only anticipating a $20,000 profit on the flip. You\u2019re going to be $10,000 in the hole after all is said and done. Whoops!<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Rehab overages happen all the time in real estate. You can\u2019t pretend they never happen because if you do, you may end up in this exact situation.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Every real estate investment strategy comes with different risks, and every property you consider will come with risks.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">While not a comprehensive list, here are some examples of major risk factors to rental properties and flipping strategies to give you an idea of what kinds of things you should look for:<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Rental property risk factors<\/span><\/h3>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Unexpected repairs<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Bad tenants<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Extended vacancy periods<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Declining appreciation due to external factors (i.e., the local market or neighborhood)<\/span><\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Flipping risk factors<\/span><\/h3>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Rehab overages<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Rehab delays<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Property not appraising for expected&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/estimate-arv\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">after-repair value<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;(ARV)<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Market slowdown or crash causing a significant drop to the ARV<\/span><\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\">To understand some of the risks specific to individual properties, I\u2019ll use rental properties as an example. Here are risks that can negatively impact the bottom line for the investor:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Limited tenant pool, causing the possibility of extended vacancy periods and having to lower rent<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">A lower-quality neighborhood increases the risk of bad tenants<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Poor property condition that forces excess repair and maintenance expenses<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Cash flow numbers are tight, meaning there\u2019s more reliance on appreciation<\/span><\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\">You should not move forward on an investment strategy or a specific property without understanding exactly what the risk factors are for that strategy or property. If you have no idea what could be looming around the corner in the shadows, you won\u2019t be able to see it coming until it\u2019s too late, and you may not recover from the loss it causes. However, if you\u2019re aware of things that can happen, you can more adequately take steps to help prevent the loss as best as you can.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Question #3: What Specific Risk Mitigations Can I Implement to Minimize Risk?<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Unfortunately, there&#8217;s no fool-proof, 100% solution that allows investors to avoid every possible risk that may hit an investment property. The best any of us can do is put as many risk mitigations in place as possible so that we\u2019re simply minimizing our chances.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For example, if one of the greatest risks to rental properties is bad tenants who cause a lot of damage, don&#8217;t pay rent, and run up eviction costs, an easy mitigation is to try to increase our chances of attracting higher-quality tenants. How can we do this? Invest in nicer properties in nicer neighborhoods. Better properties in better areas can still end up with a bad tenant, but the chances of it happening are lower.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Does this example mean we should never invest in properties in rougher neighborhoods? Not at all! There are a lot of investors who specifically focus on properties in high-risk areas. The trick here is to go back through all of these questions we\u2019re talking about, identify the risks specific to high-risk properties, and figure out how to help mitigate those.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For instance, one of the most effective ways of handling bad tenants comes down to how they are managed, whether by the investor or a property manager. Many property management companies specialize in bad neighborhoods. They have developed systems that are especially effective with challenging tenants and use those methods to help overcome the risk of ongoing expenses.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The first step is studying your strategy and&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/investment-calculators\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">property analysis<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;to understand the risks. After that, you want to make sure you have appropriate risk mitigations in place. While risk mitigations won\u2019t necessarily solve all possible problems, again, it\u2019s about decreasing your chances of undue expenses as best as you can.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Applying the Questions to Your Investing<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">There\u2019s absolutely no wrong answer when choosing an investment strategy as long as you\u2019re willing to dive deep into how to make that strategy work, both in the processes and with the specific properties you may acquire. Fortunately, diving deep isn\u2019t an extensive process! As long as you understand how you\u2019re going to profit, what the risks specific to what you\u2019re doing are, and how to mitigate those risks best, you\u2019re going to be miles ahead of most.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Remember, even if you identify every risk and implement every risk mitigation option available to you, there\u2019s no guarantee that something won\u2019t still negatively impact your investment along the way. Sometimes things happen, and that\u2019s just part of the game. Your job then, as a successful real estate investor, is to learn how to manage challenges and pivot whatever you need to so you can resume your path to profitability. It can be frustrating, but it\u2019s the on-the-job training that\u2019s inherent to being a real estate investor!<\/span><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_d61eaf5957696fe5c90380215e37ad1b\" class=\"visibility-group alignwide  hidden\">\n        \n\n<div id=\"hero-block_afe2cbf55b0acada6b10a8578ced089b\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-slate-200-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-1\/2 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-slate-800-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Find the Right Agent, Close the Best Deal<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:18px\">Step #1: Use Agent Finder to match with top <em><strong>investor-friendly<\/strong><\/em> real estate agents to help you find, analyze, and close your next deal.<\/p>\n\n\n\n<div id=button-custom-event-block_e06979724aea43c7bfcfe8a75a6ed3da class='button-custom-event'>\n      <a\n    href=\"https:\/\/www.biggerpockets.com\/agent\/match\"\n        x-on:click=\"window.analytics.track('Blog Block | B2C Marketplace Agent Finder', {\n      referrer: 'https:\/\/www.biggerpockets.com\/blog\/questions-to-ask-before-buying-an-investment-property',\n    });\"\n    class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Find an Agent<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/2 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/Marketplace-Blog-Blocks-Agent-v3.png\" alt=\"investor friendly real estate agent\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a\n    href=\"https:\/\/www.biggerpockets.com\/signup\"\n        x-on:click=\"window.analytics.track('Blog Block | Acquisition | Free Membership Signup', {\n      referrer: 'https:\/\/www.biggerpockets.com\/blog\/questions-to-ask-before-buying-an-investment-property',\n    });\"\n    class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n\n\n\n<p><em><span data-preserver-spaces=\"true\">What criteria do you focus on for your strategy? Let us know in the comments below!<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Investors often purchase an investment property without having a solid handle on exactly how or if&nbsp;it will be profitable. To be fair, none of us were given instruction manuals when [&hellip;]<\/p>\n","protected":false},"author":782,"featured_media":144142,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5524,7119],"tags":[],"class_list":["post-144141","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-investing-for-beginners","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/144141","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/782"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=144141"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/144141\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/144142"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=144141"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=144141"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=144141"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}