Real estate investing can potentially grow your wealth over the long term. Many people have become millionaires by investing in real estate. However, it doesn’t happen to everybody. There are also people who have had massive losses in the property business. Sometimes, it’s because of factors beyond their control. There are many parts that need to fall into place for a real estate investment to be successful. However, most of the time, it’s because of bad investment decisions. The fact is that the house hunting process for real estate investors is quite different from that of home buyers. Many new real estate investors make the mistake of choosing an investment property based on emotions. While it may be okay when buying a home to live in, an investment property search should be approached differently. Your personal tastes won’t matter since you won’t be living in the house yourself.
To choose the right investment property for your real estate portfolio, there are some important factors you need to consider. This often makes the process of buying a house for investment long and strenuous, especially for first time real estate investors. To make the process smoother, it is good to have a house hunting checklist. A checklist will help you to be proactive and organized in the process of finding the right investment property, thus helping you to reduce mistakes made by most investors. And remember, while a home buying checklist may include things like “bay window with a view” or “yard big enough for the kids and the dog to play in”, you won’t see any of that on a real estate investor’s list!
Here is the ultimate house hunting checklist for real estate investors:
☑ Good Location
☑ Property Value
☑ Low Maintenance
☑ Positive Cash Flow
☑ Good Return on Investment
☑ Appreciation Potential
☑ What Tenants Want
The first item on your house hunting checklist should be the location. This is because location is the most important factor to consider when buying investment properties. Picking the right cities and neighborhoods is crucial to getting a great return on your investment. The location will determine your rental rate, the quality of your tenants, and the occupancy rate. A poor location that doesn’t offer what tenants need will have low rental income and a high vacancy rate.
A good location is one with access to plenty of neighborhood amenities. Proximity to the following amenities makes your investment property more appealing and valuable to prospective tenants:
- Public transportation
- Shopping centers
- Entertainment facilities
Safety also factors into the appeal of your neighborhood. Make sure you have researched the crime trends of the neighborhood before you invest in a property.
Keep in Mind That a Good Location Is Not Industry-Dependent
Property is a long-term investment. Therefore, investing in real estate based on short-term economic boosts can be very risky. The presence of a local industry often leads to property booms. People move to such regions to find work, thus making house prices soar.
However, if the property business in the region depends on a single industry (like manufacturing, for example), the success of your real estate investment will be wholly dependent on that industry. In case the industry falls, the value of your investment property will decline. As people move away from the region, the demand for properties will also fall. This will lead to lower rental rates. People who had purchased investment properties during the industry boom would become less able to afford their mortgages. For this reason, it’s wise to look for rental properties in areas with multiple industries.
When investing in real estate, it’s not only a matter of how much you can afford but also how profitable the investment property is. Just because you can afford to pay more, doesn’t mean you have to. You need to compare the purchase price of a property to intrinsic value. What is the value of the property compared to what you’re paying for it? Making sure you’re not overpaying needs to be on your house hunting checklist.
The purchase price should be less than the property’s intrinsic value if you want to generate returns. Otherwise, you may end up paying more than what the property is really worth. Several factors will determine the true value of a property. the best way to determine the value of an investment property is to look at its real estate comps.
One of the biggest mistakes that a property buyer can make is not considering the additional costs involved in purchasing the property. Beginner real estate investors all too often underestimate how property conditions can influence their investments. How much will the renovations and ongoing maintenance work cost you?
If you can’t keep up with the maintenance work, you won’t be able to provide good service. This will create a reputation and you won’t attract tenants, which will hurt your rental income. A good rental property has very few maintenance issues. You shouldn’t be spending lots of money monthly just to keep the property operational.
Choose an investment property that doesn’t drain your budget with regular maintenance issues. You should avoid luxurious properties with large gardens, pools, systems, and all sorts of appliances, especially if you are still a beginner real estate investor and are going to manage the rental property yourself. Such properties necessitate a lot of care and can become a big headache. The extra cost will also eat into your profits.
Positive Cash Flow
Profit for a rental property comes from the difference between rental income and expenses. Keep in mind that high rent prices don’t necessarily mean that you will have positive cash flow. Sometimes median-priced investments with average rent yield better cash flow. Make sure that the rental income you garner from the properties you assess surpasses or at least covers your expenses, including mortgage payments, property taxes, repair and maintenance, management, insurance, etc. Sometimes, it may make sense to buy a negative cash flow property if there are obvious ways to turn things around. Nevertheless, you need to know your projected cash flow.
Good Return on Investment
After calculating your cash flow, it is also important to know the amount of income you will receive relative to the amount invested. Cash on cash return and cap rate are the most common metrics used to calculate the return on investment of an investment property prior to purchasing. Try using our investment property calculator to find and analyze the return on investment of investment properties across the United States.
Capital growth is an important factor in real estate investing and should also be on your house hunting checklist. Look out for areas that are expanding in terms of economy, infrastructure, and population. What new developments or revitalization efforts are being made in the area? The construction of new amenities will boost future property values in the region.
You can get in touch with your local council or look at council and government websites for information on new infrastructure project proposals. For instance, a lot of ongoing construction shows that it is probably a high-growth area. If you buy an investment property in a declining area, you will experience losses when you eventually sell.
What Tenants Want
When finding investment properties, you should aim to secure one which will appeal to the active tenants in the local real estate market. How appropriate is the rental type for the average age of the residents in the region? Does the property have useful features for the target market? For instance, if you are acquiring an investment property in an area with an older community, your rental property should not have many stairs or an inconvenient layout.
Therefore, it’s important to do some market research to understand the basics about the demographics of your area of choice and what is important to them. Apart from the tenant-specific requirements, your rental property investment should also have the little things that renters look for. This includes storage space, wall space for shelves, curb appeal, modern bathrooms and kitchens, etc.
The Bottom Line
As you can see, the house hunting process for real estate investors is not easy. There’s a lot that goes into buying a house for investment. However, having a house hunting checklist can greatly help in alleviating the challenges and it’ll enable you to find the best real estate deals. The right combination of these features could make your investment more profitable.
Are you a beginner real estate investor looking to buy an investment property? Be sure to use Mashvisor to find the most profitable investment properties. To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.