Have you ever wanted to invest in real estate, but didn’t know what makes a good egg from a bad egg? Real estate investments can be challenging, but very beneficial. So focus on these top five priorities when searching for a real estate investment, to avoid getting a bad egg.
1. Location . . . It’s Everything
Without a doubt, location is the most important factor to consider when looking for a real estate investment property.
Knowing the area of the property will give you an idea of the type of tenants to expect and how successful the property can possibly be. For example, properties near universities tend to be successful, as you can expect students to be of the primary tenants. The types of tenants and nearby area can also provide insight to expected vacancy and occupancy rates. Sticking with the university example, you can predict occupancy rates to be higher during the school year and vacancy rates to reach its peak during the summer once students go home.
Consider other aspects that make an area attractive, such as its job market, schools, and amenities. More job opportunities in an area means more people in that area, which in turn, means more potential renters. This can secure and increase the property’s value. In contrast, having the property’s value linked to a single company can be risky if the company is not doing well or if it shuts down entirely. To find out how well your desired area fares in job markets, check the U.S. Bureau of Labor Statistics.
Areas with schools of respectful reputations will definitely attract more people into that area. A real estate investment property with near amenities such as movie theaters, gyms, parks, will also generate more demand to move into the area.
Always keep in mind of any potential detriments to the area. If the area is susceptible to natural disasters, you can expect part of your returns to be taken away to cover insurance costs. Renters are also more likely to stay away from these areas. Crime in an area is obviously a huge turnoff, check with the police for crime statistics of the area of your selected property.
Related: 5 Must-Have Features of an Income Property
2. A Pretty Property
Now that we’ve covered the things to consider about the property’s location, let’s shift our attention to the property itself.
The success of your real estate investment can be affected by the property you choose to invest in. Some things to consider about the property are the property’s type, its appearance, its quality, and your investment strategy – a traditional lease or a vacation rental.
If you are new to real estate investing, consider investing in a condo. What makes investing in condo great for real estate novices is that they require less maintenance. The condominium association will assist you with external repairs, that way you’re mainly concerned with the interior. Condo fees, however, can be a downside.
Single-family homes are also lucrative investments. One advantage to such homes is that they have lower vacancy rates, as they are typically rented long-term. A possible disadvantage is having more demands from renters and more maintenance on your part.
An appealing appearance of the investment property will certainly lure renters, especially if the property is a vacation rental or an Airbnb rental. Some features to consider are balconies, pools, fireplaces, good views, and storage space. These features can be desirable for both vocational and housing rentals.
The quality of the building is almost a no-brainer. Well-constructed and well-designed properties fare off better in the long run over poorly constructed and designed properties. Not only that, but they tend to rent out more and at higher rates, while requiring less maintenance and repairs. A home inspection will assess a property’s quality.
3. Decent Price and Property Taxes
The physical aspects of the property and its location are not the only ones to consider. The financial aspects are just as important!
Obviously, you will need to know the price of the real estate investment property. Try purchasing based off value, in other words, try buying a property at or below the cost it would require to construct that building today. This cost is also known as the replacement cost. For example, if costs $400 per square foot to build a new building, but you buy one for $350 per square foot, then you have made a valuable rest estate investment. Not only does buying at value save money, it can help you generate more profit if the price increases in the long run.
With any kind of income comes one’s most despised burden – taxes. Property taxes will vary. You will need to know how much you are losing to taxes, so refer to the area’s assessment office or talk with homeowners in the community to get an idea of the amount of taxes you will pay. Sometimes high property taxes are not a bad thing if the area is a great place for long-term renters. This may not always be the case, though, keep that in mind.
Related: 9 Things Every Real Estate Investor Needs to Know
4. Positive Cash Flow
You definitely want a real estate investment that generates positive cash flow. Cash flow is the movement of money into and out of a business. Positive cash flow is when you still have money from your earnings after paying off monthly payments (such as mortgage payments, taxes, and maintenance). If you do not receive positive cash flow, you shouldn’t invest in the property. If you’ve bought the property and aren’t receiving positive cash flow, it is important that you keep your finances stable. In time, with some renovations and improvements, a successful property will begin producing positive cash flow.
Need to calculate these costs? Use Mashvisor’s investment property calculator. It will also provide you with a better insight on seasonality trends, vacancies, history of traditional and Airbnb occupancy rates, and more.
5. Risk vs. Reward
Finally, after combining all the mentioned aspects together, ask yourself this: is the risk higher than the reward for this investment property? Hopefully the answer is a solid NO. Avoid these potential risks to assure that this is the answer you get.
You surely need to maintain the property to keep it suitable for your tenants, but make sure the property does not require too much maintenance. This tends to happen if the property was poorly constructed or is in a bad area. If maintenance begins to consume too much of your time and resources, it would be wise to halt the real estate investment, ditch the area, or find an alternative solution.
Another detrimental risk is when you are not gaining money (even in the long run) off of the investment but are insteadlosing. Make sure that some profit remains after you’ve covered the appropriate expenses from the rental income.
A good way to anticipate potential risks is to analyze, review, and test given reports and documents about the property, before and even after you make the investment. Accumulate enough research to predict where the area and the property will be heading in the near future, perhaps a five-year time span. Your present conditions, expenses, and earnings could be projected to change. For example, if an affordable area is expecting improvements soon, but property taxes are also expected to skyrocket, your earnings could downtick or even vanish and lead you in bankruptcy.
It’s no secret that a real estate investment can be risky, especially for a novice. Hopefully with these tips, smart choices, calculated moves, and creative adjustments, it can produce stable and profitable income.