Are You About to Pay Too Much for an Investment Property?

[Corey Dutton]

As prices continue to rise in most U.S. real estate markets, many buyers are starting to pay too much for investment properties. Because each sub market has unique forces that are driving it, it is crucial to understand each sub market that you are investing in. If you buy in a market that you don’t understand, you will likely pay too much for an investment property in that market. But if you already understand your sub market, how do you know if you are paying too much for an investment property?

Don’t get emotional. Stay all business when it comes to buying real estate and never allow yourself to get emotionally attached to a deal. Put together a detailed checklist for each investment property you look at. Some properties will be missing crucial items on your checklist. Checklists also help investors avoid emotional attachment, e.g. “This is such a killer deal if I don’t jump on it now I will lose it!!”

Don’t do what most investors do and look at 2-3 properties, make an offer on one, and then buy one.Follow the rule of 100/10/3/1. This rule is that you should look at 100 properties, you should make offers on 10 properties, and of those offers maybe 3 will be accepted, then go ahead and purchase 1 property.

Pay attention to the days on the market for similar listings in your sub market before making a purchase. Find comparables for your investment property that are listed. Are the comparables to your investment property sitting for a long time on the market? What prices did the properties on the market start at, and where are they now? If there are no comparables for your investment property close by, then look at the next closest comparables to your property type and see how long these properties are sitting on the market before they sell.

Also, be sure to look at the price history for the investment property you are buying. You may find out that the price history has been nothing short of a roller coaster ride, and that the incredible deal you think you’re getting on a property, may not be so incredible.

In many markets in the U.S., investment property prices are continuing upward. In your search for investment properties to buy, use a specific strategy to make sure you aren’t paying too much. Many of the Biggerpockets members on this forum understand this much better than myself. Please share any other tips on this topic that you feel will help other investors from paying too much for their next investment property.