Well, that’s the million-dollar question, right? Everyone in the world of real estate financing wishes there was an easy, straight-forward answer.
But there isn’t. After all, there are books and books written on the matter. Thus, while we can’t pretend to be giving you the full answer to the “What does every real estate investor need to know” question, we show you the top 9 things that every real estate investor should be aware of and take into consideration.
The ultimate goal of any real estate investor is to make money. This means buying a good investment property at a reasonable price which can be rented out for a fair rent and/or eventually sold for a profitable price. Easier said than done, you would think. However, if you follow our simple tips, you will be on the way to becoming a successful real estate investor. As we have highlighted over and over again in previous articles, location is the key to a profitable real estate investment. We will repeat it again here. When looking for a new property, always start with the location. There are a few things you need to consider in this regard:
What Every Real Estate Investor Should Know about the Location:
- Current Local Price Trends. As a potential real estate investor, you should study the price of homes in the area which you contemplate for your future investment. Check whether the current price trends are on the rise. Compare the average home price in the area to the prices in the nearest neighborhoods and cities. You can always check out Mashvisor for easy-access information on prices and other crucial characteristics across neighborhoods in the US.
- Expected Development. Maybe the location you are thinking about as a real estate investor is not the liveliest at the moment. That doesn’t mean that it is necessarily a bad investment choice. Before you make any decision on where to buy an investment property, check out the future development plans in the area. Things to keep an eye on include: expected new roads, schools, hospitals, shopping malls, restaurants, banks, and others. To figure out this information, you could just look out the window when driving through the neighborhood. Or you could talk to someone at the roads and buildings departments at the local town hall. In any case, don’t underestimate the importance of short-to-medium-term development as it will allow you to charge higher rent and enjoy significant real estate appreciation.
- Low-Tax Alternatives. If two close-by, comparable towns offer different property tax rates, the one with the lower rates is expected to witness more demand. As a real estate investor, you should consider calling the local tax assessor to learn how much the town charges in taxes and when the area was last evaluated. If a reassessment is about to take place in the near future, this might mean that property taxes will go up. Also, avoid overcrowded neighborhoods and towns including such with overfilled schools and inferior roads. This means that new infrastructure will be needed, and tax dollars will be required to pay for this infrastructure.
- Secondary Markets and Suburbs. As highlighted in one of our recent articles, secondary markets and suburbs/outskirts are the new hot thing. Every real estate investor should know that they are not only in high demand in 2016 but are likely to gain more and more popularity in upcoming years. So, now might be the right time to purchase an investment property in the so-called 18-hour cities (for example, San Diego, San Antonio, Memphis, and Austin) or in the suburbs of the 24-hour cities (New York, Boston, San Francisco, etc.). Once again, if you are considering buying a property in such a location, check out the development plans. A new bus stop or train station, for instance, will drive prices up like few other things.
Related: 8 Real Estate Market Trends in 2016
Once you have selected a location, it is time to move to the actual rental property. Again, some of the things that we list below are likely to sound familiar, but this is only because of how crucially important they are for any real estate investor.
What Every Real Estate Investor Should Know about the Property:
5. Small Property. Don’t be greedy – start small. If you are a new real estate investor, start with a small, cheap, easy-to-manage property. Once you feel more confident in your skills as a real estate investor and you’ve made enough money to buy another property, you can always expand your business by replacing your property with a bigger, fancier one or buying a second one. Real estate investing is by large learning-by-doing.
6. Know What Is Required. Whether you are looking for a rental property that is (nearly) ready to be used or you are looking for a rehab property, as a real estate investor you should know exactly what you are getting yourself into. Study the property well to know exactly what state it is in and how much you can expect to have to spend on fixing it before you start renting it out.
7. Vacancy. Any real estate investor should know that a significant amount of investment property income can be lost due to vacancy. Thus, it is important to study the vacancy rates for your particular type of property in your particular location. Choose a kind of property and a location that enjoy high occupancy rates. Check out Mashvisor to explore the occupancy in hundreds of US neighborhoods.
8. Cash Flow. Arguably cash flow is the single most important characteristic of an investment property. If you project a strong positive cash flow, there is little else to worry about. On the other hand, if you expect negative cash flow, this means that you will need to allocate finances from your other sources (savings, your salary, etc.).
9. Internal Rate of Return. While there are many figures that a real estate investor should look at, the internal rate of return (IRR) is the metric of choice for many of the experts. It is so highly favored because of taking into consideration both the timing and the size of all cash flows, both positive and negative, including monthly rents and sale. The disadvantage is that it is rather difficult to calculate, but you can always use software or an Airbnb calculator to do that. A good IRR should be double-digit, and most real estate investors agree that it should be in the teens. However, be careful. If you calculate an IRR that looks too good, maybe there is a mistake in your data or assumptions.
Now that you have these tips to guide you through real estate investing, you can start your journey as a real estate investor. Enjoy!