At one time or another, you may have seen a “For Sale” sign on a house and thought to yourself, “I could make a profit off of that.” But, some properties have more potential for success than others. So, how do you recognize a good investment when you see one? Listed below are three considerations you should make before investing in a property.
The first consideration you should make when looking at good investment properties is the location. For this process, you should set aside your personal living preferences, and examine the most ideal spot for potential tenants. For example, a unit in an urban community is most likely going to bring more traffic than a house in the countryside. Along with community location, you should also consider what shops and activities are available in the area. Examples of ideal shopping conditions include a grocery store, a convenience store, and a clothing/merchandise store. Activities vary based on specific locations, but can include the beach, tourist attractions, nature centers, libraries, recreation centers, and restaurants.
Two more important aspects of location are the property’s proximity to schools and to workplaces. Determining ideal property locations for these conditions requires research about the leading occupations in the area, as well as the most popular schools. Researching schools in the area is especially important if you are targeting families and college students as potential tenants. These clients may be willing to pay more just for being closer to a highly-desired school.
When making a big purchase decision such as buying a property, you want to make sure the building itself is intact. If you are looking to invest in a recently constructed or renovated property, you will find yourself making a hefty purchase price. On the other hand, if you buy a fixer-upper, you will need to invest significant funds to get it in a rentable condition. It is most important to make sure the building is structurally sound and complies with regulations. This can be confirmed by a home inspector. Keep in mind that most properties are going to require repainting, window treatments, and/or appliance purchases; however, it is advised to stay away from properties that require major repairs like severe water damage or electrical problems.
Along with the condition of the building itself, you should also pay attention to the curb appeal. Ideally, landscaping should be as simple as possible to save time and money during upkeep. While a large yard may be appealing to some tenants, if it is left unlandscaped it can become a hassle and an eye sore. A small yard can be dressed up with mulch, rocks, and small bushes/plants to make the outside of a unit look clean-cut while keeping maintenance low.
The last, and arguably most important consideration when determining if a property is a good investment is the current state of the real estate market and economy. As a general rule of thumb, investors should buy low and sell high, however it can be difficult to determine what price is considered low when trying to invest in a fluctuating market. Two methods used to quickly gauge potential profitability are the 1% rule, and the 100 times rule. The 1% rule states that to produce a positive cash flow, at least 1% of the property’s purchase price should be able to be charged for rent. If you do not think you can charge that high of rent for the property, it is likely not a good investment. The 100 times rule states that if the price of the property is 100 times less than the rent, then it is likely to be a good investment.
Both of these methods are good for general estimates, however you will need to perform more detailed calculations to determine if a property is truly a good investment. This entails gathering info such as monthly mortgage payments, property taxes, vacancy rate, and maintenance estimates and subtracting it from the amount of rent you expect to receive each month. Budgeting is an essential part of investment management and can be the difference between making a good or bad investment.