4 Things to Know about Buying an Investment Property

investment property

In the classic boardgame Monopoly, buying a property is as simple as dropping a few (fake) dollar bills in the bank, picking up a tiny plastic building, and placing it on a space.

If only it were that easy in real life.

Much like properties you ‘purchase’ in the boardgame, a real-life investment property is any property purchased in order to generate income. It can be as simple as a family purchasing a second home to rent out as an Airbnb. Or it can refer to larger-scale investments, such as multi-family residential complexes or business real estate: office buildings, strip malls, retail spaces, or any other commercial real estate properties.

How do investment properties make money? Often, it’s rent. Much like their boardgame counterparts, investment properties generate income by charging tenants to occupy a space. So long as the income generated by the property exceeds the cost of ownership, the property will be profitable.

However, staying profitable can be a challenge. Ownership costs include everything from the initial purchasing price to the costs of ongoing maintenance, repairs and renovations, advertising the space, checking credit scores of new tenants, handling evictions, paying property taxes, etc. The costs add up quickly, and some of them are less than obvious.

Then there’s the down payment. Starting around 15%, down payments of investment properties are often significantly higher than those of other properties, such as single-family homes in which the buyer is also the resident. (Down payments for investment properties are so hefty because these properties are considered higher-risk investments than a personal home. The buyer, it’s assumed, is less dependent on the property; therefore, they are more likely to abandon the investment.)

Due to the down payment and the often-underestimated costs of ownership, cashflow issues are especially common in the first two years of an investment. If a buyer doesn’t carefully plan their cashflow, they may not have enough (real, non-Monopoly) cash left over after covering the initial down payment to cover maintenance, repairs, etc.

Besides rent, investment property owners can turn a profit if their property appreciates (increases in value) over time. Occasionally, some event – such as a large employer, like Amazon, moving into the area, or a change occurring in the economy that increases the strategic value of a region – will cause properties to appreciate quickly, sometimes literally overnight. We’ve seen that recently, with phenomenon like COVID-19, the rise of ecommerce, the dynamic logistics industry, and changes in the globalized economy increasing volatility in the market and causing the value of certain areas to rapidly rise or fall.

But those quick, extreme changes are still rare. Generally, in communities with strong, growing economies, appreciation occurs over long periods of time, often decades. As new businesses move into the area, residents follow, growing the local workforce and the consumer base. This triggers a positive feedback loop, in which people bring more businesses and businesses bring more people. As a result, local properties become increasingly desirable, and their value increases over time. An owner of a property that appreciates may raise their tenants’ rent to match similar properties in the area, or they may sell their property for a higher price than their initial investment, increasing their overall return on investment.

There are, as we briefly outlined above, many factors besides location to consider when purchasing an investment property: Do you have the cash to cover the down payment, as well as ongoing maintenance and repairs? Do you have the time, energy, and expertise to run the property yourself, or would you be better off outsourcing that work to a property management company? How long do you plan to hold onto this investment, and how might that determine the properties you consider?

However, as anyone who has bought real estate – the real kind or the Monopoly kind – knows, the single most important factor is always location. Where you invest determines what kind of tenants you will be able to attract, how your investment’s value changes over time, and ultimately your return on investment. To invest in real estate is to invest in a community. And choosing the right one can make all the difference.

With that said, here are four things you should consider when selecting a community for your investment property.

If you’re looking for a location in which to invest, you may start by looking for businesses related to yours.

For example, if you are looking to invest in a strip mall for retail businesses, you may look at communities that already have a strong retail environment, as retail businesses often benefit from being close to peers.

On the other hand, if you are looking to invest in real estate for a hotel or residential complex, you may look at nearby attractions, employers, and other entities that might attract visitors or residents to the area.

2: The local business climate

Is the local government committed to growing and sustaining the local economy? This can be tough to gauge, but we recommend talking to business owners in the area, reaching out to local government leaders, and examining local tax rates.

3: Access to a major city

Being close to a major metro area opens up a pool of potential tenants for your property, while providing tenants with a larger workforce, more customers, and additional employment opportunities.

4: The health of the local economy

There are two ways to gauge the health of a local economy. We recommend trying them both.
First, look at the key economic indicators of the community. Population, retail sales, occupancy, unemployment rates and other key metrics can give you a good sense of a community’s health. We also recommend looking at the diversity of the local economy: is it contingent on one specific industry, or is there a variety of sectors represented in the community? A more diverse economy is a more resilient one.

The other way to gauge a community’s economic well-being is by driving through it and talking to people who do business there. How does the community feel? Are there parks and busy retail areas? Are business owners generally pleased with the area? Obviously, this is a more subjective approach than examining data, but knowing that you would like to live, work and do business in a community indicates that others would, as well.

Explore Altoona investment properties

Located minutes east of Des Moines, Iowa, Altoona is a growing community with a strong local workforce, a thriving retail scene, several major entertainment attractions, and opportunities for both commercial and residential real-estate investment. To learn more about investing in our community, start by taking a look at our key economic indicators or search for available properties here.