No one can deny that investing in residential real estate properties is one of the best investment strategies to make money and secure financial security in the real estate business. However, residential real estate investors only succeed if they find the best residential homes to invest in. So, how do they do that? What should they take into consideration when investing in residential real estate? Let’s find out!
Look for the Best Location
When investing in residential real estate, the location in which you decide to invest can make or break your investment. In fact, location is so important that even the best residential homes with the best numbers fail if their location is a bad one. Why? Well, there are a number of reasons:
Location Is Constant
Residential real estate investors can change many things about their residential homes – renovate them, buy new furniture, or even make them bigger – but one thing they can’t do is move the property or change the area around residential investment properties to make it more suitable.
Location Affects Profitability
Location is key in determining how much rental income a residential real estate investor can charge when renting out residential homes and how much the running costs will be. In turn, this determines whether residential investment properties will generate a positive cash flow (and increase profitability) or a negative cash flow – which no real estate investor wants.
Location Determines Appreciation
The land on which residential investment properties are built will experience appreciation depending on a number of factors (such as population and economic growth) which are related to the location of the residential homes. For example, if you’re investing in residential real estate and buy an investment property for a purchase price of $150,000, and the location of the investment property experienced an economic growth, you could sell it for $300,000 in the future.
Therefore, when residential real estate investors are looking for residential investment properties, they have to know where to look!
So, what makes for the best location? Typically, you can find the best residential homes in neighborhoods that are developing, have a growing job market, and are located near amenities like schools, transportation, restaurants, hospitals, etc. Neighborhoods with these features usually have high demand and positive return on investment!
Related: Should Real Estate Investors Consider Moving to a New Location in 2018?
Determine the Best Property Type
When it comes to the types of residential investment properties out there, there are quite a few options to choose from! There are single-family homes, multi-family homes, townhomes, condos, etc. Residential real estate investors determine which the best investment type of residential homes is depending on their investment strategy, budget, and a number of other factors.
For example, if you’re interested in purchasing residential real estate investments for the sole purpose of renting them out in the short term on Airbnb, then it’s better to invest in a vacation home or a townhome than to invest in a single-family home or an apartment building, as these are more suitable for traditional, long-term rentals.
Moreover, when investing in residential real estate, your investment strategy plays a huge role in determining the best residential homes for you to invest in. A residential real estate investor wishing to expand his/her investment portfolio should diversify his/her investment property types. On the other hand, residential real estate investors looking to make a quick profit should look for residential homes that are in a bad condition and fix-and-flip them. The best choices for this case are foreclosed properties and short-sale homes: real estate investors could buy them at a cheap price, renovate them, and then sell them at a higher price to make quick profits.
Whichever residential investment properties type they choose to focus on, residential real estate investors should ensure they have a solid investment strategy and a financial plan to guarantee the success of their residential real estate investments.
Related: What is the Best Investment Property Type in the Real Estate Market?
Conduct Investment Property Analysis
In order to find the best and most profitable residential homes, a residential real estate investor will need real estate analytics. Real estate analytics are the calculated values and estimates of returns, expenses, and other metrics which affect the amount of money real estate investments generate. Real estate analytics are either calculations on on single property, or data comps (comparisons) for a number of different properties in an area.
Click here to get a hold of real estate analytics of residential homes in any state throughout the US!
At Mashvisor, we like to focus on three main metrics:
Cash Flow
Cash flow is a very simple, yet an important real estate metric. Basically, the cash flow of residential investment properties is the difference between the monthly income generated by the investment property minus the monthly expenses you spend on it.
The best residential homes are positive cash flow properties – these are the ones that residential real estate investors should aim to find. Having negative cash flow (when the expenses exceed the profits) indicates that you’re not making a profit from your residential real estate investments.
Cap Rate
The capitalization rate estimates residential real estate investors’ return on residential investment properties that are paid for in cash. To calculate cap rate, we divide the net operating income (NOI) by the purchase price of the investment property. Real estate investors use cap rate as a measure of the level of risk and profitability. Thus, a high cap rate (which is what a residential real estate investor should look for in residential homes) means higher risk, which in turn means higher profitability.
Cash on Cash Return
Cash on cash return (or CoC return, for short) calculates the rate of return on residential investment properties that are paid for with a loan – which is what most residential real estate investors opt for. The cash on cash return equals the NOI divided by the total amount of cash actually invested in the residential real estate investments.
Before buying residential real estate investments, investors should know what the CoC return on residential homes is because it provides them with analysis of these investment properties – which further helps them find the best investment.
Related: Real Estate Analytics: What’s the Difference between Cap Rate and Cash on Cash Return?
Alternative Ways of Finding Residential Homes
Finding Residential Homes by Networking
Real estate is a people business. The relationships that a residential real estate investor creates over the course of his/her career are valuable assets; someone you know may have a great deal up their sleeves, or they might know someone else that does. Make sure your real estate network includes tenants, realtors, other investors, contractors, accountants, etc. Moreover, stay in touch with your contacts so you’ll be the first to know and make an offer when you find the best residential homes.
Related: Creating a Real Estate Investment Network: Who Do You Need?
Finding Residential Homes Online
Technology has made finding residential homes much easier. There are many websites that help residential real estate investors find the best investment properties. Websites like Mashvisor offer various resources and even property records and neighborhood information to further help in analyzing the investment property.
Click here to start searching for the best investment properties in any state, city, or neighborhood in the United States!
Finding Residential Homes at Auctions
Auctions are becoming a popular source of finding residential homes for sale, especially for a residential real estate investor looking for a bargain. While you can find any type of residential real estate investments at an auction, most of these properties will be foreclosures.
Conclusion
Finding residential homes requires more than just driving around and looking for a “For Sale” sign. When investing in residential real estate, real estate investors need to take certain factors into consideration like the location of the property, its type, and its analytics. Alternative ways to find great residential investment properties include networking, online websites, and auctions.
Sing up for Mashvisor and use our platform to search for and find the best residential homes and determine the best investment strategy and type of property, in addition to getting hold of a complete set of data comps and analytics related to properties you’re investing in.