One of the greatest things about real estate investing, no doubt, is the fact that you have virtually unlimited options. You can buy an income property in thousands of different locations across the US; you can choose between various types of properties and numerous strategies; you can go on your own or in a partnership.
However, you might be surprised to hear that many real estate investors do not like having so many choices, especially when it comes to selecting and buying a rental property. Actually just like many homebuyers, some real estate investors consider the investment property search to be a real nightmare because they find it particularly hard to narrow down so many available options. If you are one of those investors, no worries – following are some specific practical tips how to narrow down choices during an investment property search.
To begin with, choosing your ultimate income property during your investment property search should be based on 3 key factors: BUDGET, LOCATION, and PROPERTY. Definitely none of these comes as a surprise because any real estate investor – whether new or seasoned – would know that these are the basics of a successful real estate investment business. But let’s see how you should use each of these indicators when narrowing down your choices during an investment property search:
1. Prepare a budget
Before you even start looking at actual properties, you should sit down and calculate your finances. Prepare a tentative budget based on your available cash, financing options (such as mortgage), and expected expenses associated with buying and managing the rental property. Once you’ve seen how much exactly you can afford to spend on a property, stick to this number during the actual investment property search. Don’t buy a more expensive property than you can afford just “because you like it”.
Related: How To Budget For An Investment Property and Cash Flow
2. Decide on the key parameters of the property
Once again, even before you start looking for properties, sit down and think carefully about what kind of income property you would like to and will be able to own and manage. First of all, choose a location. Decide whether you want to go for a local investment or out-of-state real estate investing. Choose the city and the neighborhood. Decide whether you want a single-family home or a condo; how many bedrooms and bathrooms you want; what rental strategy you would go for – traditional or Airbnb (if you decide to go for Airbnb, you would need to study the local legal issues in this regard); etc. The more specific you get, the easier it will be to narrow down your options even before you get into the investment property search, which will make your life as a real estate investor much easier. But don’t forget that you are choosing the ideal investment property here, not the perfect home for yourself and your family. Don’t think about what kind of property you would like live in but what kind of property would be the most profitable as a real estate investment.
3. Make lists
Make a few lists for your future income property: one of the must-haves (i.e., features that you simply cannot forgo – e.g. in Houston, in the Montrose neighborhood, a single-family home, 2 bedrooms); one of the nice-to-haves (i.e., features that would have an added value but are not so obligatory – e.g. 2 bathrooms, a garage, a garden); and one of the deal-breakers (i.e., features that you simply cannot accept – e.g. a leaking ceiling, a kitchen that needs immediate maintenance). Make sure that your lists are as feasible as possible. They should be based on real estate market analysis and comps rather than just on your whimsies. For example, you cannot put down a single-family property with 3 bedrooms, 3 bathrooms, and a garage in Lakewood, Seattle when your total budget is $200,000. Once you have your budget and your lists, you are ready to submerge yourself in the actual investment property search.
Related: 5 Must-Have Features of an Income Property
4. Perform an online investment property search
Start looking for available properties in your selected location that match your budget and your lists from above. The more precise your selection criteria are, the more you will be able to narrow down choices. While looking at the available properties, you should start making some choices right away. For example, it is generally advisable to go for a property that costs less per square foot. Bigger properties tend to be cheaper per square foot and to get more appreciation in the long term. Also, you can rent them out for more. Once you’ve selected a few properties, check their surroundings online. Google Maps and Google Earth, among other online tools, could be very helpful in allowing you to explore the neighborhood and area before even visiting the property. It is important to narrow down your options as much as possible before starting the physical visits because they take time and cost money, especially when you decide to invest beyond the 20-mile radius.
5. Stay organized
The best way to stay organized during your investment property search is to build a simple database with the income properties that you are seriously considering. Excel would be a good option for this as it allows you to organize the available information in a user-friendly manner. Remember to input all valuable – and even what you think might be valueless – information into your database. The more properties you see, the more you will forget the first ones, so you will find any piece of information of worth.
6. Start the offline visits
Once you’ve narrowed your options down to a few properties that you can afford and that match your basic criteria, go visit them. First, make a quick round of all your top choices. There are some potential rental properties that will immediately fall off your list just because they are not as they were advertised online. While on site, remember to take photos and notes of the main features. After you have visited all properties and dropped down some, go back to those that are still under consideration. Make a more careful analysis now. Look at the details. Take more pictures and more notes.
7. Use Mashvisor’s investment property calculator
After you have liked some properties in person, it is time to do the actual investment property analysis. Don’t worry, you don’t have to do that on your own. Simply take advantage of Mashvisor’s rental property calculator to compare prices, costs, financing options, rental income, cap rate, CoC return, occupancy rate, and others – for traditional and Airbnb. Now you can narrow down even further to those properties which offer the highest profitability – in terms of cap rate and CoC return. Also, the investment property calculator will allow you to avoid any properties that are not likely to generate positive cash flow. You will find Mashvisor’s rental property calculator to be an invaluable tool in your investment property search as your biggest support in narrowing down choices.
Related: Why An Investment Property Calculator Tells You More Than Just Numbers
8. Stay reasonable, don’t get emotional
Throughout this process of investment property search, you should remember to stay reasonable and not get emotional. Don’t ever forget – you are buying an income property, not your own home. Once you’ve set down priorities – remember the lists from point 3? – stick to them. Of course, you might need to make some compromises, simply because your ideal income property does not exist, let’s say. But you should not give up on the basics at the least. And always always always make sure to stay within your initially set budget. While you can go down, you should never go above what you can afford as you might lose your property to the bank if you fail on the mortgage payments or you might end up with a negative cash flow real estate investment.
After reading the tips above, the investment property search should sound like a less daunting task. The key is to take a systematic approach to it; to set your priorities in advance; and to stay reasonable. And not to forget to use Mashvisor which has important figures on thousands of available properties across the US.