A real estate investment is only as good as the property you invest in. Make the wrong purchasing decision, and you’ll have a much tougher time making a decent profit than you would if you had bought into a better property.
The question is, how do you know if a specific property is worth parking your money in?
If it has the following traits, then you’ve got a winner.
1. It’s Located in a Growing Area
You might have found a fabulous deal on a great property, but have you paid attention to the area it’s in? The last thing you want to do is sink your money in an area that’s stagnant in growth, or even heading down the tubes.
Check out the local market, and see if you can find any news about new jobs coming up on the market. Research the current status of the local economy. Look for new companies opening up, and lots of new residential and commercial construction. See if there is an increase in the number of homes being renovated or even completely rebuilt, and newly landscaped yards. Find out if there are currently any plans for expanding infrastructure (new roadways and public transit lines).
You can easily find out valuable information by visiting local government websites. Look for census information, such as population, household income, number of schools, number of children, and so on. Information like this will tell you what direction the neighborhood is headed in. If the area appears to be stable or growing, you’ve got a good contender.
2. The Vacancy Rate is Low
If you’re planning on renting out your unit for the long haul, you want to make sure that the vacancy rate is low. The last thing you want is to continuously advertise your unit for rent and screen potential tenants. You also don’t want to have your unit vacant all the time between tenants. That’s as good as money lost.
Ideally, the vacancy rate should be no more than 5%. Making sure that the property has a low or dropping vacancy rate is crucial to keep your place rented out, as well as make sure you have a healthy cash flow.
You could be collecting a hefty rent, but if the vacancy rate is 20%, that will seriously eat into your profits. Too many months out of the year with no tenant and no rent checks coming in is bad for business. At the end of the day, you want to buy an investment property in an area where demand for rental units is high. That way, the vacancy rate will be lower and the rent rates will be higher.
3. It Makes Money For You Right Off the Bat
Don’t approach a potential investment deal with the idea that the place will make money for you eventually. Basically, the income you generate should cover all of your up-front costs.
A good rule of thumb is to look for a property in which 10 months’ worth of rent can easily cover your mortgage payments, property taxes, insurance, and all other expenses. Similarly, make sure that the monthly rental rate you can charge is at least 2% of the entire purchase price of the property. Look at what comparable units are charging for rent to see what you would realistically be able to charge, and crunch the numbers from there.
4. Desirable Amenities Are Nearby
While looking at the numbers in-depth is critical to ensure a property will make money for you, don’t forget to have a look at the surrounding amenities. Understand what’s happening in the neighborhood, which will give you an idea of the type of tenant that would be attracted to it.
A property located near a highly-rated elementary school, for instance, would more likely draw young families that are looking to plant some roots, which would point to a low turnover rate.
Areas close to public transportation, shops and eateries would likely attract millennials, who are more likely to favor areas that have a high walkability score.
Look at the type of shops and eateries that are in the neighborhood. Odds are the area is a solid one if there’s a Trader Joe’s, Starbucks or Whole Foods in it. High-end chains like these spend a lot of money scouting out up-and-coming neighborhoods with residents who have the financial means to support their shops. That have even been studies done that show a positive relationship between the existence of stores like these and property values.
Getting out of an investment property is not only a hassle, it’s downright expensive. Make sure the right decision is made before you sign on the dotted line so your real estate investment is a profitable and headache-free one.