Real estate makes an excellent investment according to the experts. It’s supposed to be one of the simplest ways to start investing your money within one of the most stable markets.
But when it comes down to buying a property, it’s not as easy as you may have imagined to find a worthy investment. How do you tell if a property will make a great investment? Here are a few tips from the experts:
Use the 1% Rule for Rentals
Real estate writer Tara Mastroeni shared with Forbes that the 1 percent rule is a standard for realtors looking to invest in income properties. Basically, it means that you should be able to set the rent at 1 percent of the upfront cost of the property.
“Keep in mind that…you’ll have to add together the purchase price, plus closing costs, and an estimate of the total repair costs necessary to make it rentable,” Mastroeni continues.
She also says that it’s not worth considering a property if it doesn’t pass the 1 percent rule. There will be other houses.
“At this point, it’s worth setting up showings for the properties that meet this rule’s criteria,” she concludes. “From there, you can narrow down your options further, according to your likes and dislikes.”
Avoid Houses with Complications
Real estate expert Miriam Caldwell says that it’s best to try to avoid major complications down the road. She recommends researching the land deed carefully so that if you plan to sell a property in the future, complications won’t arise that make that difficult.
She uses the building of new roads or subdivisions as an example, as these can affect property values down the road—sometimes for the better and sometimes for the worse.
“Also, be sure these isn’t a lien on the property,” she says in an article for The Balance. A lien would make a future sale infinitely more complicated.
In all, she warns that there are risks with investing, and you can’t always be prepared for the future. “Things may change, and an area that you thought might increase in value might not actually go up, and vice versa,” she says. But doing your research ahead of time can significantly decrease the risk of experiencing a loss.
Lower Your Expectations
Many property investors walk into a property feeling underwhelmed by the outdated nature of the property. They worry that no one will rent it because it doesn’t have the appeal of the latest and greatest properties.
Elizabeth Ann Stribling-Kivlan, New York broker and realtor, says that one of the biggest problems she sees with buyers is the attachment to properties that are way out of their reach. They watch HGTV and expect wonders when home shopping, even though that’s not reality.
“In order to score a great deal on a property, buyers need to forget the HGTV hype and let go of lofty expectations,” she told Forbes. “Buy the ‘worst’ place on the block and slowly renovate as your budget allows.”
She also says it’s important to be willing to sacrifice on a few lesser items, particularly when it comes to an income property. You might have your sights set on a certain low-maintenance material in your kitchen, but it may not be possible when you’re looking for a good value property.
“Formica and old appliances won’t kill you,” she continues, “and the there is a lot to be said for the value of location over the perceived value of something as easily replaceable as countertops.”
Instead, she recommends looking for good bones like a strong foundation, clean walls, solid flooring, and sound windows. These will reduce your maintenance requirements, and you’ll still attract good renters.
Check Emotions at the Door
Emotions can go either way when you walk into a potential investment property. A gorgeous structure with effortless decorations might make your heartbeat faster while an outdated eyesore will have you wanting to run the other way. Unfortunately, your emotions can give you the wrong impression in either one of these situations.
Joshua Dorkin, founder and former CEO of Bigger Pockets, warns that the numbers are far more important than the emotional aspect of a deal.
“It is easy to get emotional about a deal, no matter how experienced you are,” Dorkin says. “If you know your numbers and stick to them, it takes the emotion out of the equation. This can save your wallet, big-time.”
This goes back to the 1 percent advice common among experienced investors. Always make sure a property would make financial sense before you let yourself fall in love with it.
And remember that you don’t have to fall in love with a property if it makes financial sense. You won’t be living there, after all.
Pay Attention to Your Market
Doing research is essential to finding a great property, but only if you’re researching within your desired neighborhood. Sam Dogen, founder and primary writer for the investment blog Financial Samurai, warns against comparing a property you’re considering investing in with the national market.
“[Don’t] extrapolate property statistics,” Dogen writes in an article. “Just because one report says San Francisco property prices are up 19.6% in May year over year doesn’t mean I’ll get to sell my home for 19.6% more. My home price is up maybe 10% given it is higher than the median. You can throw national statistics out the window as well.”
As you calculate your financial gain, do your due diligence in the local market only. “The best price to find out what your home is worth is if your neighbor sells,” Dogen continues, pointing out that the statistics in your area will give you a general direction that prices are heading as well as areas of potential strength to watch in the future.
Ask the Experts at Green Residential
Choosing a good investment property in the Houston and the surrounding areas is challenging to say the least, but you don’t have to worry when you have experts like Green Residential realtors and property managers on your team.
With more than three decades of experience in the area, we’re the reigning experts in all things property investment and management in Houston. For more information about the many services we offer to property investors, contact us today!