Buying real estate might seem like a daunting task unless you have a well-defined set of objectives. Foremost, the property should meet your financial goals, particularly relating to your expected cash flows.
If, for example, one of your main objectives is to generate a $300 cash flow every month. This can guide you when searching for the “right” property, which is most likely to be a multi-unit or small apartment building.
Read on the other guidelines that will help you find a great deal when buying real estate, which can be a great source of passive income for prudent investors who know how to do their homework.
Conduct Neighborhood Analysis Before Buying Real Estate
The neighborhood where your property is located has a huge impact on the success of your real estate investment or lack thereof. Be sure to choose an established area, i.e., increasing population, improving the job market, business expansion, creation of commercial establishments, etc., or at least a neighborhood that has the potential appreciation.
In contrast, avoid neighborhoods with high crime rates, declining population, high unemployment, and other similar red flags. The reasons are obvious: Your property will go down in value, and you will experience high vacancy rates, or worse, you will attract difficult tenants.
Examine the Possibility of Natural Disasters
Stay away from floodplains or areas near a large body of water, unless the property has been constructed or renovated in adherences to FEMA-imposed modifications that include backfilling the basement and other excavated areas, elevating the ground floor above the base flood, and installing flood openings.
Another thing you have to keep in mind: Properties in disaster-prone areas are more expensive to insure, which can eat away at your rental income. Again, what we aim for is to have a positive monthly cash flow, which is the quintessence of passive income.
Scan the Surrounding Amenities
Look for amenities that attract high-quality renters: malls, parks and green space, public transport hubs, restaurants, theaters, and gyms. Drive and walk around the areas closest to the property to get a first-hand perspective of what everyday life looks like.
Take into Account the Current Job Market
Growing employment opportunities and expanding businesses attract high-quality renters, particularly yuppies and middle and upper-middle-class families. You can visit the US Bureau of Labor Statistics website or go to your local library to learn what companies are coming into the town.
Consider Future Developments
Properties in high-quality neighborhoods almost always come with an exorbitant price tag. Hence, a good alternative is to choose a property in a “promising” area, meaning there will be new apartment buildings, office spaces, parks, malls, and other commercial establishments in the near future. Additional new housing is also an auspicious sign that the area is experiencing exponential growth.
Buying Real Estate from Multiple Sources
When looking for properties to buy, novice real estate investors rely solely on multiple listing service or MLS without giving much thought about other sources that may provide better deals. For instance, not many people are aware that direct marketing, which entails sending out emails to motivate sellers, can be a good source of “sweet deals” because the properties are not listed for sale, and thus you don’t have as much as the competition.
Other leads you may want to consider include wholesalers, sale by owners, foreclosure sellers, auctions, short sales, and even sellers from social media such as the proverbial Facebook.
Make Sure the Vacancy Rate in the Area is Low or at Least Dropping
Choose properties with a vacancy rate of less than 10 percent, or even more ideal, well below 5 percent. With less vacancy, you can almost always expect better rent and higher quality renters.
It might be tempting to buy an investment property that comes with a cheap price tag and has a potentially high cash flow without considering the vacancy rate. This is one of the most common mistakes of novice investors who end up holding on to their properties that have been unoccupied far too long.
Should you encounter a seemingly nice property but situated in an area that has a vacancy rate slightly above the 10 percent limit (perhaps 12-13 percent), you must consider multiple factors that will determine if this will change for the better or worse in the near future. If you feel it will stagnate in the next coming years, stay away from the area at least for the time being and allow for the neighborhood to further develop.
Another equally important variable is the number of listing and how much it fluctuates. For instance, an unusually high listing rate in an area could mean a seasonal cycle, or on the other end of the spectrum, a property market that has gone sour.
Assess the Rental Income Before Buying Real Estate Investment
A good number of real estate investors rely solely on the rental income, which you must be able to gauge before you purchase any property. Aside from learning the average rent in your area, consider variables such as the mortgage rates and payments, taxes, and other accruing costs.
The ability to forecast the property taxes and other changes that will impact your real estate investment can help you avoid financial disaster in the future.
Find a Professional Property Manager for Your Prospective Real Estate Investment
While it may come as a surprise, most industry experts suggest that you find a property manager even before buying real estate investment. This remains advisable even if you are considering managing it yourself. After all, someday you might be overwhelmed by too many properties under your portfolio, making it impossible to take even a weekend off from the responsibilities that come with management.
When looking for a property manager, ask for his fees, qualifications, and experience. Hiring someone who is highly qualified may cost around 10 percent of the gross rent. A reputable PM can take a huge burden off your shoulder.