2
Oct

Choosing the Right Investment Property in Today’s Market

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by Mike Sargent, HomeLovers Co-founder and Investor.

Choosing the Right Investment Property in Today’s Market

There is only so much that you can to do improve an investment property once you own it, so the selection process is absolutely critical. HomeLovers executives have owned and/or managed thousands of homes over the years, learning what NOT to buy, and what properties work great. If you want to avoid buying someone else’s nightmare, choose your property with care.

It’s easy to monitor sales stats, price changes, appreciation and many other factors that affect ROI. Once you learn how to analyze each opportunity, you will run away from most properties that new investors chase – a “great deal” without considering who will live there. The most challenging variable to pin down is the future tenant, an analysis skill that only comes with experience. Rental data is private and difficult to analyze in any meaningful way.

You want to you invest in a property that is most likely to meet your long-term growth criteria, provide the lowest cost of ownership and attract the best possible tenants in the market.

Long Term Growth

In our current market, most of the low-end “steals” are gone.  Appreciation over time is going to be a more important factor in your buying decision than it has been for the past couple of years.  The <$100,000 part of the market doesn’t hold an exclusive on great deals.  When you have great buys in every price range, what drives your choice?  Step away from the bargain trap and stay objective.  Run the numbers to see which property is most likely to appreciate over time.

Critical questions relative to appreciation:

  • Is the neighborhood new, in recovery, or in decline?
  • Are all cities created equal?
  • What about different zip codes in each city?
  • What about subdivisions in each zip code?
  • Are the builders in each subdivision the same?
  • What about lots and floor plans?

At some level, every one of these points has a huge impact on how the home will perform. For most real estate investors, appreciation will be the bulk of their ROI. You CAN’T AFFORD TO BUY WITHOUT CONSIDERING LONG-TERM GROWTH. Never buy a home without being confident that it will appreciate much better than the other homes you are considering.

That’s true even during this time of modest appreciation.

Low Cost of Ownership

Be careful with floor plans and features. Most of the things you see when you look at a property have very predictable life cycles. All of them have a replacement cost that you can estimate and factor into your decision.

On a rental home, investing a little more money up-front to make the home more durable can make a difference when it comes to your maintenance and repair budget.

For example, vinyl floors will get destroyed while tile floors still look great, even when you have great tenants, and laminate counters need replacement long before granite.

If the home you are thinking about has flat white paint, realize that you’ll have to budget for repainting after the first tenant, if not before.

A home that has more bedrooms but narrow hallways and tight corners will have more wear and tear as families move in and out, and live there. When you see enough homes left rough and ragged, compared to homes that are left clean, clear patterns emerge. You may feel you have no control over long-term maintenance costs, but you can dramatically reduce them when you “buy smart.”

Vacancy is huge factor in cost of ownership and is very predictable. Why would you ever purchase a property that is a great steal if it is highly likely to be vacant frequently? This is a huge consideration. Will the average tenant stay in a roomy home longer than a small condo?  Of course! Which will rent faster?  Which will be left in better shape? Is the neighborhood nice? Close to shopping? Close to freeways and jobs? Your great deal doesn’t make a great investment if it is only rented nine months out of the year.

The Best Possible Tenants

You choose the type of tenant when you choose the home. Every neighborhood has renters, including those with multi-million dollar homes.

When you look at a home, ask yourself “who would want to live here?” If the answer is “somebody who is desperate and has huge financial problems”, keep shopping! Do you really want to put any of your financial future in that tenant’s hands?

If you buy in low-income neighborhoods, you’ll get low-income tenants. It is common sense, but not everyone takes time to think through the details.

If you can’t buy homes that attract the best tenants in the Arizona market, ALWAYS look around the area and make sure the property you are buying will attract the very best tenants in that neighborhood.

Following that rule alone will put you ahead of the vast majority of people who own rental homes. Combine this with the above tips on long-term growth and low cost of ownership, then you will consistently outperform the many investors that “got a deal” on the wrong home.

SUMMARY

Consider these three key factors before buying an investment property… long term growth, low cost of ownership, and attracting the best possible tenants.

If you master these three skills, or hire an expert before you buy, then you will build a portfolio tailored for success. The market is full of prime investment properties at incredible values. There is no reason to settle for a “deal” that will be a long-term money pit. Everybody is saying “the time to buy is now”.  We totally agree… as long as you buy RIGHT!

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