The main goal: lowering overall risk
When searching for residential investment property, and prior to any numbers crunching on any one particular property, employ these basic strategies to help lower your downside risks when acquiring real estate for profit. Each of these search tips has its own unique shortcut for helping you decide if a property will be a cash cow or not, as well as helping determine quickly the amount of risk inherent in the potential acquisition. No sense wasting time doing your property investment search in areas that are way too risky.
The renter quotient
You’ll need to assess the overall appeal to your target market: residential renters. First, ask yourself what particular niche of renter your prospective building and/or units will be most attractive to – for example, a three family house with three one-bedroom units will only appeal to single individuals, or couples at most. Families with children would not have an interest in a one bedroom unit. Likewise, if the building contains a three or four bedroom unit, then you’ll most likely be attracting families with one or more children.
When using this shortcut, don’t worry about “market” rents just yet – be concerned with the marketability to your target niche groups – matching the right demographics to the unit. If there is higher demand in the building’s area for families, say, in suburbia for example, then try to key in on houses with three or more bedroom units. However, if you were looking in an urban setting, where there may be greater demand by single individuals and couples, you’ll reduce your overall risk by looking only at buildings with studios or one bedrooms as their units.
Look at infrastructure
When evaluating properties in any particular area, always keep a key eye on the current – and more importantly, proposed or planned for, infrastructure. What new highways are being built? Is there currently easy access to the building? What is the availability of good transportation in the region? Are buses and trains close by? In addition, are employment centers nearby as well? What is employment like in the area? Are there existing malls and/or good shopping availabilities in the area? All these are important in attracting good tenants…and therefore being able to charge market rents for your units. I’ve previously written articles here explaining the Walkscore. Make sure you check the Walkscore (at Walkscore.com) for any given area you plan to search for your new acquisitions. The higher the score, the greater the appeal to renters – and the lower your overall risk of ownership.
Key in on high-volume sales regions
Are you considering running your property investment search in an area with very few cumulative sales in the past year? This would be a mistake. Make sure your search area is in a relatively high-volume sales area. It doesn’t matter what the sales prices are – only that the relative volume will help lower your risk should you need to sell – and sell quickly. Of course there will be different price-break points for different-sized buildings. But the key point here is to understand that overall sales volume in a given region should be a key factor in determining whether you even bother searching in that area or not. As a rule of thumb, the more rural the area is, the greater the difficulty in unloading the property should you need to do so…even if the cash flow of a particular investment property looks great on paper. Be very wary of this as you run your searches.
Can the investment property attract home buyers too?
Again, think down the road…Besides other investors like yourself, can the property you’re evaluating also appeal to a homebuyer – or a homeowner who would like to live there while also renting out the other units in the building? The more niche markets you can appeal to, the greater the chances of lowering your downside risk should you be forced to sell the property. Since there are many more home buyers in the U.S. than property investors, it makes sense if you can find a building that would appeal to both markets.
Is the property attractive to you?
Basically, could you live in the building, or one of the units in it, if you lost your employment, or were forced to move from your home? After all, if it’s a suitable living environment for yourself and/or your family, it should probably be a good place for potential renters as well. Make sure it’s a place that you can give your own personal “good housekeeping” seal of approval. Not simply if things were to go south for you someday, but more importantly, so you can feel good about the product you’ll be placing on the market to rent to others – your tenants – your lifeblood and cash flow.
photos courtesy of flickr.com, anchoragehomesearch.com, best-realestate.com.au, wisely-usatoday.com, activerain.com, neighbors.denverpost.com, sultharproperties.com