Investing in real estate can be financially rewarding with care, planning and good partners. If you are a first-time investor, the fundamental question of “How do I find a property worth investing in?” has crossed your mind. It may even be keeping you from taking the first step. In this blog you will find the six fundamentals to identifying profitable investment properties.
It’s different than finding a home for yourself.
House hunting for your primary residence is different from house hunting for an investment property. You will be in competition with homeowners, so knowing what characteristics and qualities renters need is important. We’ve put together a list of six fundamentals to identifying profitable investment properties:
Look for recently built homes.
When you begin your search for an investment property, one of the top factors should be the year the home was built. Anything before 1965 could be a significant hassle. There could be structural or foundation problems, failing appliances, unsafe electrical systems, and inefficient windows, to name a few of the common challenges. An older home will have you digging deeper into your pockets for improvement expenses.
Renters look for space, so the amount of rooms and square footage matters when you begin your hunt for an investment home. “Three bedrooms, two bathrooms, and at least a two car garage is ideal,” Said Seth Evans, Real Estate Investment Advisor at RPM Iowa. “It’s even better if you can find a property with a fourth bedroom, because that adds value and your monthly cash flow will be higher.”
Think about investment properties with a garage, or build one into your budget.
Include a garage as a criteria while you search for the perfect property. A garage on the property is extremely valuable because it offers extra storage space and a shelter for vehicles in harsh weather conditions. “Garages are essential nowadays. Especially in new construction – a brand new home without a two or three car garage will not be profitable for you,” Explained Evans.
If the perfect property checks all the boxes for you minus the garage, think about adding it to your budget. You can choose between an attached or detached garage, but make sure to check your city’s codes beforehand.
Focus on the location of the potential investment properties.
You should be looking for investment properties close to essential amenities. Is the home in a developed community, or will there be one built around your property soon? According to a study by Access Development, urban consumers want to travel less than 15 minutes to make everyday purchases. The more frequent the need to purchase, the less consumers are willing to travel. Your future tenants will want to be close to gas stations, grocery stores, restaurants, gyms, and auto services.
Consider a home with a finished basement.
Finished basements have the potential to raise your property value because it adds to the overall usable living space. A basement can be used as an additional bedroom or guest bedroom, recreational area, or storage space. A bathroom is not a must, but it can attract tenants and give you the opportunity to raise your rent.
If you have found what you believe to be the perfect investment property and it does not have a finished basement, consider factoring this project into your property improvement budget. You can save a significant amount of money by working on the basement yourself, but be sure to outsource the trickier improvements, such as plumbing and electrical work. Doing so will save you headaches in the future.
“A finished basement is more relevant for a value-add home,” Evans defines a value-add home as a house that has been around for a while. “With new construction, a finished basement is more valuable when the owner goes to sell the home, not while renting it out.”
If you’ve got the means for it, new construction can grow your wealth too.
New construction can be a tricky and sometimes risky game to play. But with the right team to guide you through, there’s plenty of cash flow to be made in new construction investment properties.
There isn’t any historical data to go off of in a brand new neighborhood. You need to look at surrounding neighborhoods in order to determine whether or not a new construction build will be profitable. “We have a specific performance strategy,” Evans said. “We can determine whether or not a property will appreciate 3-5% over the course of the next few years.”
The more a neighborhood develops and builds get added and filled with homeowners, the more expensive it gets. This can happen quite quickly, within six or eight months of the development of a neighborhood. Jumping on a house within the neighborhood early on can put more cash in your pocket over time.
Be prepared to budget.
There are multiple expenses that you will need to cover right off the bat. The budget for buying your investment house is up to you, but it helps to have ballpark estimates. RocketHQ suggests spending around $160 per square foot (PSF) for a newly constructed home. A ranch style home should be about $185 PSF and a resale home should be close to or under $140 PSF. Besides purchasing the home, you will also have to take into account the homeowner association fees, property taxes, mortgage insurance, landlord insurance and regular maintenance fees.
To ensure a more predictable budget that will make your investment properties produce the most cash flow, you’ll want to be sure your rental agreement specifies tenant responsibilities. Things like utilities like water, electricity, trash and sewage. Most tenants expect these charges to be their responsibility.
Investment properties can become a passive source of income.
It may seem like a lot of research and responsibility, but over time, your investment properties can become a passive source of income. Like any other investment, you want to be as prepared and informed before you put your hard-earned money into it. A Real Estate Investment Advisor and professional Business Development team can help you. They will have the tools and resources to get you onboard successfully, so you can reach your financial goals. If you have any questions about investment properties and how to get started, contact us today.