Single-family rental properties have proven to be a financially rewarding investment, but not if the investor chooses the wrong market, or the wrong neighborhood, the wrong property, or the wrong real estate investment firm. In this comprehensive guide, we’ll take you step by step through the process of smart-selecting a cash flow investment property.
1. Choose a market
2. Choose a neighborhood
3. Choose a property
Choose a Market
Invest for Profit
Often, an investor’s first inclination is to invest nearby, since it seems safer or easier; however, nowadays, with the likes of Rentometer, Mr. Landlord, PropertyWare, SmartMove and Dropbox, your research, and even your purchase, can be completed online — without ever leaving the comfort of your home (or favorite poolside lounge). In fact, U.S. real estate investment from outside the country reached an all-time high in 2017.
Furthermore, if you limit yourself to your local market, your initial real estate investment cost may be too high, diminishing any profit you might earn.
As a general rule, you want to find a property with a rent that is close to 1% of the purchase price.
Conduct a Detailed Analysis
Identifying the right market for your property investment requires careful scrutiny of a variety of factors, including:
1. Market growth
Is the market you’re considering at its peak? Past growth draws attention, but it typically means you’re too late. You know the tenet Buy Low, Sell High, so make sure you analyze the market’s future growth, instead.
2. The job market
What’s the unemployment rate in the market you’re considering? Has it gone up or down over the last five years? What are the projections for the next half decade?
3. The housing market
It goes without saying that the housing market is a critical consideration when determining where you should invest in a property. And when analyzing a housing market, the two most important variables are:
A. Home values
If you’re looking for appreciation, there’s nothing more important than the growth rate of home values in your market. If you’re looking for cash flow, the same could be said, as rents typically increase parallel to home values.
B. Rental rates
Once you’ve found your market, you need to determine whether there are rental properties there that will meet your financial and investment goals. Research the rental rates of the area to calculate the average rent you can expect to receive over time. Will that amount cover the purdchase price and property management fees to generate the profit you seek?
Choose a Neighborhood
You’ve located your market (the right place) and decided on a max sale price and minimum rental income (the right price). Before you can isolate the right property and make an offer, you have to narrow your search to the neighborhood(s) that will provide you the greatest opportunity for immediate and long-term growth (in income, equity and ROI). And when analyzing neighborhoods, there are four traits that are most important:
1. Income levels – median income levels at or near 3x rent
2. Schools – a highly rated school system
3. Amenities – rich in all basic amenities
4. Transportation – multiple forms of transportation
Choose a Property
When searching for the right property, you want to be sure the property is in good condition and, ideally, already occupied. This is where finding the most reputable real estate investment firm comes in. At Pioneer Homes, every property we sell has been fully vetted and, as needed, renovated using the finest quality materials. All homes are in clean, safe neighborhoods and have passed building codes. And every home is occupied by long-term, pre-screened tenants.
Whether you’ve chosen to work with a real estate investment firm like Pioneer Homes, or do the legwork yourself, you must ensure that the property you select will meet your financial/investment goals. To find out, you have to run the numbers:
1. Annual Income
3. Annual Cash Flow/ROI
Download the report, Buying a Rental Property: A Step-by-Step Guide
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