Prices for single family houses are lower than they’ve been in decades in some regions. It’s tempting to want to buy investment property in areas that used to cost tens of thousands of dollars more than they’re selling for today. But don’t think that just because a house used to sell at a higher price a few years ago, that it’s a “bargain” now. In reality, many houses were overpriced to begin with. Here’s how to avoid making some big mistake buying investment property in a down market.

Location is still the one thing you can’t change about a property once you own it. (Even if you pay to move the house, the lot can never be moved.) When the single family market was at its peak, it was a seller’s market in most cities in the United States. People were in a buying frenzy because inventory was so low. As a result, houses in bad locations sold just as fast and often for the same price as houses in good locations.

But in today’s buyer’s market, the bad locations are sticking out like a sore thumb. In a buyer’s market, houses that are located on busy streets, or underneath electrical towers, or next to commercial properties (especially if the businesses are noisy or smelly) will either take longer to sell or sell for a much lower price than other similar houses. So be careful. The lower price for these houses doesn’t mean that they are “deals”. It just means smart buyers won’t pay as much for them due to their “problem” locations.

Condition is always something that smart investors pay attention to. But it’s even more important in a buyer’s market, especially if a house needs more than just paint, carpet and other “cosmetic” repairs. Be careful that the roof doesn’t need to be replaced, or that the foundation doesn’t need extensive repairs. Those items are expensive. If you intend to fix up the house and resell it, you may not be able to get your money back for the cost of major repair work.

Cash flow is important if you plan to rent your investment property. The most important research you can do is to find out what the average income is for the kind of tenants you expect to have renting your property. Tenants can’t pay rent that is higher than their income. If your payment will be higher than the rent your prospective tenant can pay, then the house is not a “bargain” for investment purposes.

Tags: mortgage, finance