When it comes to investing in real estate, location becomes a crucial factor in deciding the ultimate fate of your investment property.
To buy an investment property, real estate investors take into account the quality of the neighborhood, the nearby amenities, the economic factors, and the US housing market as a whole. Not only are you interested in the condition of the property, you have to factor in the environment it is in before closing the deal. Rental properties in prime locations and safe neighborhoods attract high demand from tenants, which results in high rental income and positive cash flow return on investment. The ultimate investment strategy is buying rental property in a thriving location under market value.
Related: How is the US real estate market 2017 different from the US real estate market 2016?
Things to Consider When Buying an Investment Property
1. Condition of the House
Buy an investment property in good condition with minimal repair and renovation. Make sure to hire a property inspector to appraise the house in order to mitigate huge costs down the line. This goes without saying, but make sure that you fix all serious issues before any tenant moves in. Keep the house in an orderly fashion and enhance its visual appeal for attracting more tenants and an overall high rental demand.
2. Good Return on Investment
The best investment properties reap high ROI and positive cash flow return in the long term. Make sure to estimate the cash flow return before you buy an investment property. Conduct cash flow analysis and use an investment property calculator to estimate your net profit. As a general rule of thumb, buy an investment property reaping a rental income return of 1% from the total price of the house.
For example, if you buy a house for $200,000, it would need to bring in $2,000 a month ($2,000/$200,000 =0.01 = 1%).
3. Property Taxes
Make sure to buy an investment property in a location with reasonable property taxes. Paying too much property taxes can hurt your earning potential and eat into your profits. Look into the property taxes before you close the deal on a house. Another rule of thumb: higher property taxes are found in metropolitan areas, and lower property taxes are available in more rural locations. Another key point to keep in mind: finding the best investment property in the perfect location with high property taxes will not equate to good return on investment.
4. Insurance Costs
Similar to property taxes, make sure to choose an insurance plan with minimal costs on your real estate investment. Look into your options before you buy an investment property. Paying too much insurance costs can also eat into your profit potential.
5. Neighborhood
Choose a safe neighborhood with nearby amenities, schools, grocery shops, and entertainment venues. For example, if you are investing in a single family home, you want to look for neighborhoods suitable for families and children. To ensure a high tenant demand, the neighborhood of choice must be in a safe location with a booming economy and high employment growth.
Related: Why Is the Buy and Hold Strategy Best in Real Estate Investing?
6. Unexpected Costs
Mitigate your unexpected costs by estimating your monthly expenses and net profit before you buy an investment property. The worst case scenario is finding out about major renovations and repairs after buying the rental property.
Best Places to Buy an Investment Property Right Now
Following is a list of the best places in the US housing market to buy an investment property at the moment:
- 1-Year Job Growth Rate: 4.6%
- Unemployment Rate: 4.5%
- Median Property Price: $311,952.04
- Traditional Rental Income: $1,749.58
- Airbnb Rental Income: $904.18
- Traditional CoC Return: 2.52 %
- Airbnb CoC Return: 2.9 %
- Traditional Cap Rate: 2.52 %
- Airbnb Cap Rate: 2.9 %
- 1-Year Job Growth Rate: 3.6%
- Unemployment Rate: 4.6%
- Median Property Price: $346,473.01
- Traditional Rental Income: $1,760.57
- Airbnb Rental Income: $1,639.11
- Traditional CoC Return: 2.65%
- Airbnb CoC Return: 3.85%
- Traditional Cap Rate: 2.65%
- Airbnb Cap Rate: 3.85%
- 1-Year Job Growth Rate: 3.7%
- Unemployment Rate: 4.7%
- Median Property Price: $272,640.63
- Traditional Rental Income: $1,160.46
- Airbnb Rental Income: $837.63
- Traditional CoC Return: 1.79%
- Airbnb CoC Return: 1.3%
- Traditional Cap Rate: 1.79%
- Airbnb Cap Rate: 1.3%
- Median Property Price: $299,375.00
- Traditional Rental Income: $1,662.46
- Airbnb Rental Income: $2,075.62
- Traditional CoC Return: 3.3%
- Airbnb CoC Return: 4.96%
- Traditional Cap Rate: 3.3%
- Airbnb Cap Rate: 4.96%
- 1-Year Job Growth Rate: 0.2%
- Unemployment Rate: 4.9%
- Median Property Price: $393,678.16
- Traditional Rental Income: $2,262.93
- Airbnb Rental Income: $1,022.76
- Traditional CoC Return: 4.8%
- Airbnb CoC Return: 1.8%
- Traditional Cap Rate: 4.8%
- Airbnb Cap Rate: 1.8%
Do Not Discount Real Estate Market Analysis
Do not neglect to conduct right real estate market analysis before you buy an investment property. Mashvisor gives real estate investors valuable tools (including the investment property calculator) and metrics (rental income, cash on cash return, and cap rate) to measure and analyze their ROI in an instant. Analyzing and appraising real estate is a surefire way to guarantee a good return on investment. Successful investors are well aware of the research and due diligence that it takes to find positive cash flow properties as well as to keep up with housing market trends and forecasts to invest at the right time for the right price. Find real estate comps for your comparative market analysis, use an investment property calculator, and conduct cash flow analysis to estimate your ROI.
Related: Which US Cities Are Heading for a Housing Bubble?
Conclusion
Without investing in the right location, real estate investors will risk losing money, incurring a high vacancy risk, and facing high tenant turnover. To mitigate this risk, find the best places to invest before deciding to buy an investment property. Once you key in on a good neighborhood, start looking for rental properties within your price range. If you are looking to buy your first rental property, hire a professional real estate agent to walk you through the process and guide you along the way. Investing in real estate has many perks, the key is to invest in the right place when the price is right.
Head over to Mashvisor for more real estate insight!