Whether we’re talking about a new real estate investor or one who has had his/her hand in the game for some time, investors are always looking for the best real estate investing opportunities in the market.
The question is: How do you recognize these opportunities? What exactly makes a great deal and how do you go about finding it?
What the Best Real Estate Investing Opportunities Look Like
There are three main things that can make a real estate investment a great one. When performing an investment property analysis, you should be looking for an investment property that comes close to achieving these three elements:
1. Good Cash on Cash Return: When you make an investment, you’re using money that was possibly getting a certain amount of cash on cash return. Ideally, your goal is to try to increase that amount through your new investment. For this to happen, you need to buy a positive cash flow property. An investment property calculator, like that of Mashvisor’s, can give you values of cash on cash return on any property to help you figure out if it gives you a good cash on cash return.
2. Low-Risk Investment: The concept of real estate investing itself, of course, brings about a high risk, but there are certain properties that are of lower risk to the real estate investor. You’re looking for a simple cash flow investment property that you can wholly own, which is a much better real estate investing opportunity than, say, a fixer-upper or development of land. Of course, you’ll have to do the proper due diligence and investment property analysis to be sure that you are choosing a low-risk option.
3. Minimum Time and Property Management: The best real estate investing opportunities are in properties that aren’t going to need too much time and management. You want to be able to rent your property for a reasonable time to good tenants. Upholding a good relationship with the tenants will help in making property management easier for you whenever any problems come up.
While the attributes listed here are ideal, they’re not impossible to find. It won’t be as easy as a quick online search of MLS. Instead, you’ll need to dedicate time and hard work to researching and finding all the information that will help you make the right investment choices. Here are all the things that will help you recognize the best real estate investing opportunities as you search through a vast amount of investment properties.
Identify the Market and Submarkets
You’re looking to identify where the best housing market is located for an ideal investment property and from there, the best submarkets (the different neighborhoods). The best real estate investing opportunities will be located in an area that is susceptible to growth, both job and population. You’ll have to research different areas and keep an eye out for new construction plans, new connecting roads and highways, or new malls and establishments.
Remember, you’re thinking in terms of what area most tenants would want to live in: most likely urban areas near shopping centers, restaurants, and public transportation. For example, a luxurious, secluded neighborhood might seem tempting, but a neighborhood that has seen more new tenants would be your best bet. Whether or not it’s your personal preference, you have to think of potential tenants first when choosing the best area for your investment property.
Once you’ve narrowed your search down to an area, websites like Mashvisor can let you know how many properties are actually available in that area, right down to the neighborhood of your choice.
Related: Location Location Location- Is Location Really All in Real Estate Investing?
Consider Property Class Options
Know Property Classes
Different investment properties rank under different classes: Class A, Class B, and Class C. Class A properties are the highest quality in the market. They’re usually new and have a high price. Those that fall in class B are older but have been decently maintained. Investment properties that are labeled Class C are even older and in definite need of renovation and repair. Property classes change depending on the area you are looking at.
You will most likely find the best real estate investing opportunities in Class B and Class C simply because you won’t be limiting your possible tenants to those who can only afford a high rental price. This may make you weary because these classes, by definition, require work and renovation, but in the end, they pay off because you’re more likely to find tenants.
A real estate market analysis will help you compare different investment properties to ensure you’re getting a fair price. Mashvisor can assist you in the real estate market analysis by providing prices for comparables.
Know Your Potential Tenants
Another key factor in recognizing the best real estate investing opportunities is knowing the potential tenants for a rental property. For example, off-campus student housing that is a walking distance from a campus is a great option. Not only are these kinds of properties in high demand, but they won’t require as much work or upkeep due to the nature of the tenants: students who are not too picky or demanding about their living space conditions. An investment property that you won’t need to put much effort or money into can turn out to be a great real estate investment.
Think About Going for Foreclosed Properties
If looking at different investment properties in different locations hasn’t led you to the best real estate investing opportunities just yet, consider focusing your research on foreclosed properties: properties that have been seized by a lender because the owner couldn’t make the mortgage payments.
While it’s a sour thought to swallow (gaining something from someone else’s unfortunate loss), foreclosures can make for some of the best deals. Banks and lenders don’t want to manage properties, so they are likely to offer great deals to get rid of the properties fast.
Checking Out the Numbers
Once you’ve found a great location for the best real estate investing opportunities, it’s time to take a closer look at the numbers to make sure you get the best deal possible.
The 2% Rule
A simple rule to start you off with your calculations is the 2% rule: the monthly gross rental income should be at least 2% of the price.
Anything that falls between 1% and 2% would make a good deal, especially if you found a great neighborhood that’s sure to bring in renters.
Positive Cash Flow
For this figure, you subtract your estimated expenses (mortgage payment, property taxes, insurance, vacancy rate, repairs, etc.) from your rental income. The best real estate investing opportunities will come in positive cash flow properties.
Cap Rate
The capitalization rate is found by dividing your annual net income (minus expenses, not including mortgage payment) by the purchase price. An investment property that can give you a cap rate around 10% will make for a good real estate opportunity.
These values can be calculated using Mashvisor’s investment property calculator, to make things simpler for you as you seek the best real estate investing opportunities. Keep in mind that although the numbers look great, you still need to focus on a good location too that will attract tenants or buyers.
Making Offers: First or Last
Another way to recognize the best real estate investing opportunities is to look for a very new listing and try to be the first to make an offer. A lot of the time sellers aren’t looking for the highest price, just the first price. So, if you pay attention to when a listing first appears, make an offer quickly and you could end up with a great deal.
Alternatively, being the last to make an offer can get you a great deal as well. This works with investment properties that have been on the market for a very long time. The owner will most likely be dying to get rid of the property, and you’ll find he/she will sell for far below the actual market value.
Related: 5 Real Estate Negotiation Tips for Investors
Finding the best real estate investing opportunities doesn’t have to be an impossible task. If you take the time to perform thorough research and use this guide, you’ll be looking at some of the best opportunities out there.