Real estate is one of the most lucrative and popular types of investment. A decent property can be your retirement plan or simply a passive source of rental income for your future.
Most people today rather buy a piece of land then stocks or shares that promise higher returns. The reason is simple: real estate investments are not subject to the same risks and frequent fluctuations as the stock market. It’s a proven way to make extra money.
Simply put, it’s easier to get the most out of your investment by buying a decent property. But what makes a good investment property?
Here, we will explore the key features that add up to make a fool-proof investment property.
Location
The location should be the most important consideration when buying real estate. A good, safe neighborhood can make it easier to find well-paying tenants, as well as potential buyers. Whereas, a busy area overlooking a shopping plaza can make the same thing a landlord’s or seller’s nightmare.
Michele Tecchia explains that the location defines the attractiveness of a property. It also determines how the property will appreciate or depreciate over time. If you buy a house in a commercialized, densely populated area, your house will likely lose value over time.
To determine a favorable location, you should do a full real estate market analysis and consider crucial factors like surrounding infrastructure, public transport, schools, and hospitals before you invest.
Remember, a good real estate investment is typically in a central, accessible area. You can use real estate crowdfunding to diversify your real estate investments into new, highly desirable markets.
Good Rental Income or Positive Expected Cash Flows
A good investment property is one that brings positive cash flows or a good income after subtraction of operating expenses. Profitable real estate properties are those that follow the one percent rule, which says that monthly earnings should be 1% of the cost of a property. If the one percent rule is applicable, then your cash flows are sufficient.
So, if a property is worth $500,000, it should, on a minimum, bring you a rental income of $5,000. Although, the higher the rent, the better.
If you are still confused and curious about how fast you can recover the full cost of investment, then you may discount the cashflows.
Discounting cash flows helps you understand what will be the present value of earnings from an investment. The present value will tell you how many years it will take to recover the cost of the initial investment.
To manage your rental properties, you can also hire professionals like the Decatur property management team.
Excellent Condition (that Requires Minimal Repairs)
The best real estates are ones that can be put back on the market with modest repairs and renovations. So, always inspect the property for improvements that can drive up its value. You want to make sure you offer something great as rental property management.
For instance, you buy a property worth $100,000 and spend $10,000 on giving it a new paint job. The paint job convinces the buyer to pay $125,000 because the house looks better. You have made a $15000 profit through this, and the buyer is happy too because he got a furnished property.
However, remember that maintenance costs can sometimes be very high. In such a case, it is best to avoid the property.
Bad property investment can cause you to lose all profits in repairs.
Property Value and Growth Potential
The next important feature for good investment property is its growth potential and value. A good property is one that you can buy at its correct value or one that is likely to experience capital gains.
Capital gains, simply defined, is the appreciation of a property’s value. A property can either appreciate naturally over time or as a result of property renovations. The appreciation of property helps investors predict what profits they will make when they liquidate or sell the property.
Investors can estimate capital gains by multiplying the fair market value of an investment with the growth factor.
Profitable property value is one that has a market value that is lower than the actual fair value when buying. However, when selling a property with a market value greater than fair value is preferred.
You can calculate the fair value by conducting a comparative market analysis. As you evaluate potential investment properties, don’t forget to factor in the impact of real estate investing tax strategies on your overall returns, with careful planning and execution, you can potentially save thousands of dollars and significantly boost your profits over time. If the market value increases over time, you can get a HELOC on the rental property to then be able to draw down and acquire more properties. This can be an excellent way to boost your returns.
Conclusion
So, now you know how several factors, growth including cashflows, potential, and property location, separate good real estate investments from bad ones. Another way of analyzing the attractiveness of a property is by looking at its CAP Rate.
The Cap Rate is basically the rate of return on a property that helps determine its value. A CAP rate of 7.5% is good because high Cap rates indicate high risk in assets.
Author Bio: Financial Wolves is a blog focused on helping you make more money to achieve financial freedom. After repaying student loans, I’ve shifted my focus to make more money from side hustles, real estate, freelancing, and the online economy. Follow us on Pinterest, YouTube, Twitter, and Facebook.
I’m a 20-something stay-at-home mother and wife. I have an amazing husband, a beautiful daughter, two loving dogs, and a lazy cat. I wouldn’t change my life for anything! I love to read, listen to music, cook and blog!
Speak Your Mind