Good news – there are great investment properties out there, you just need to find one.
- Here are five key steps to finding that great investment property:
- First find a Great Location
- Show Your Ability to Pay for the Property
- Identify the Type of Property and How Much You Want to Spend
- Hire the Right Real Estate Agent
- Internal Rate of Return >10%
FIRST FIND A GREAT LOCATION
SHOW YOUR ABILITY TO PAY FOR THE PROPERTY
Great deals will sometimes be sold in one day therefore you must be able to prove to the current owner you can pay for the property. No owner will take a property off the market if she questions your ability to pay. There are two primary ways that investors use to finance properties.
- Cash and
- Cash plus borrowed money
{There are other more exotic methods that may be used by more experienced investors.}
Ultimately, you must demonstrate to the owner you have liquid assets that cover minimum of 100% of the offer price. Liquid does not mean cash. Liquid assets include: Stocks, ETF’s and mutual funds, bonds, anything you can sell in a matter of a few (seven) days. All remaining funds you need a pre-approved letter from your bank showing how much you can borrow.
WHAT TYPE OF INVESTMENT AND HOW MUCH YOU WANT TO SPEND?
There are a number of property options to get you into your first rental property, including:
- Condominium (Condo) is an individual unit residing in a building or community of buildings. The buyers will own the condominium unit itself, and what’s called an “interest” (along with all the other owners) in the “common elements” Roof and exterior walls are most often (Not Always) defined as common elements. Your ownership might include the interior surface or drywall. It is important to obtain the Covenants, Conditions, Restrictions and Easements (CC&R’s) to understand what you own and what you must insure. The Homeowners Association (HOA) will insure common areas. Buying a condo for investment is much more affordable than single-family homes and generally score higher rental income. However, with that said, condos often appreciate in value much slower than single-family homes. Because you don’t own any land, which is a key factor to increase or appreciate a home’s value., but the unit might include the interior surface or drywall. Condos come with monthly HOA’s monthly fees which can be expensive and routinely increases to cover cost. HOA’s can charge one-time special charges, in the thousands of dollars to cover major renovations/repairs.
- Townhomes are similar to buying a single-family standalone home and the owners usually own the land on which the house is situated, including any yard areas. You also own the home’s exterior, roof and interior. It is important to obtain the Covenants, Conditions, Restrictions and Easements (CC&R’s) to understand what you own and what you must insure. The HOA will insure any common areas. HOA’s monthly fees can be expensive and routinely increase to cover cost. HOA’s can charge one-time special charges, in the thousands of dollars to cover major renovations/repairs.
- Single-Family Home, you own the land, the exterior and interior of the building, any pipes connecting your property to city services (such as water, sewer, etc. and are accountability for all cost. There is no HOA, so you save that monthly fee. However, remember all major expenses such as new siding, new roof, etc. are yours. Typically expect greater appreciation on a single-family home and greater cost to buy.
- Duplex/Triplex/Quadplex: A house divided into two (Duplex) three (Triplex) or four (Quadplex) apartments, with a separate entrance for each. Similar to single family home you own all property and buildings. Remember all major expenses such as new siding, new roof, etc. are yours.
HIRE THE RIGHT REAL ESTATE AGENT
Hire an agent that is experienced in what you are searching for. If you are interested in foreclosed homes, find an agent that routinely deals in that market. If any good home that comes on the market, find an agent that is experienced in rental properties. He or she knows the difference between a good deal and a waste of your time. A seasoned professional will save you time, errors and money!
Check out the below link to find a top-performing real estate agent in your state or city of choice:
https://www.mashvisor.com/real-estate-agent
Internal Rate of Return
Internal rate of return (IRR) or annualized total return is an annual rate earned on each dollar invested for the time period invested. It is used as a way to compare different investments. The higher the IRR, the more desirable the investment.
https://www.calculator.net/rental-property-calculator.html
EXAMPLE PROPERTY IRR
I am evaluating building a fourth standalone unit on a property where we own a triplex building. One step in this decision is calculating the IRR by using a rental property calculator shown below. Here is the estimated IRR:
CONCLUSION
Determine the maximum price you should pay by deducting the costs of renovations from the value of the property. Ensure your offer price achieves your targeted IRR. Leave some off the table for negotiating purposes. Walk if you cannot negotiate a good deal. Wait for the next opportunity. “Buying the numbers” is just as important as buying the property itself.
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ABOUT ME
I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger, with a NC State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.
I left a corporate career because I had a desire for making a difference as a speaker and writer, to help others. I was blessed to be coached and mentored by strong women and men in both my family and professional life. It is my time to serve and give back.
DISCLAIMER
I started my first business at ~13 years of age (small but brilliantly created plant nursery). I am a successful investor in stocks, options, real estate and happy to share my personal finance and investment lessons learned with you.
However, I am NOT a licensed financial advisor. Please do not construe my suggestions on this blog, as recommendations for your personal situation. For individual finance advice please seek your own licensed CPA or fiduciary financialadvisors.
I write this weekly blog to make an impact by reaching an audience and demonstrating the need for financial literacy. I will help you get there.
APPENDIX: REAL ESTATE INVESTMENTS DRAFT BLOGS TABLE OF CONTENT
- IDEAL LOCATIONS Published September 13, 2020: IT’S ALL ABOUT THE LOCATION SILLY https://wealthbuildingpowers.com/2020/09/08/its-all-about-the-location-silly/
- FINDING HIGH ROI PROPERTIES
- FINDING A GREAT REAL ESTATE AGENT AND PROPERTY MANAGEMENT FIRM
- A WIN-WIN STRTAEGY FOR NEGIOTIATING THE PURCHASE CONTRACT
- HOW TO INVEST IN LONG DISTANCE PROPERTIES
- SCREENING AND SIGNING A GREAT TENANT. TAKE YOUR TIME FINDING A GOOD TENANT AND EVICT FAST WHEN YOU HAVE A BAD TENANT
- WHAT IS BETTER? CONDO, TOWNHOME, SINGLE FAMILY VERSUS MULTI FAMILY UNITS?
- PROS AND CONS OF PAYNG HOMEOWNERS ASSOCIATION FEES
- MANDATORY- YOU HAVE TO GET THE PROPERTY PROFESIONALLY INSPECTED
- ADVANTAGES AND DISADVANTAGES OF BUYING A TURNKEY PROPERTY VERSUS ONE THAT NEEDS WORK
- FINDING GOOD LICENSED AND INSURED CONTRACTORS
- USING OTHER PEOPLE’S MONEY
- INSURANCE NEEDS – INCLUDING LOSS OF RENT, LIABILITY AND UMBRELLA POLICY
- HOW TO EVALUATE YOUR RETURN ON INVESTMENT (CASH FLOW AND LONG TERM APPRECIATION)
- TAXES – THE GOOD; THE BAD; THE UGLY
- LLC OR OTHER PROTECTIVE STRUCTURES
- BUILDING AND IMPLEMENTING YOUR STRATEGY INCLUDING AN EXIT PLAN
- PROS AND CONS OF HAVING PARTNERS
- REFERENCES: WEB SITES, BLOGS, BOOKS, ETC.