The key to finding success through real estate investing is finding the right properties. A bad investment property is, well, a bad investment, and it can affect your portfolio and your finances for years. Make the right choices at the beginning, and you can reap the benefits of smart investing that much faster. The Real Estate Financial Planner™ team is here to help! Check out our advice on how to find the right property for you, and explore our resources to find more information on every step of the investing process.
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Determine Your Search Criteria
What kind of investment property do you want to own? Single-family homes? Commercial or industrial property? Multi-family homes? A mix of all of the above? It’s up to you to determine what kind of property will work best for your goals and your investment strategy.
Next, think about where you plan to look for investment properties. You can narrow it down by state, city, neighborhood — whatever works best for you. Location is everything, after all. If you are considering investing in a specific area, make sure you explore it for yourself. Take a drive and see what the neighborhood looks or feels like at different times of day. What may sound good on paper may not always feel like a good choice in person.
You should already know what you can afford and what you’re willing to pay after creating your real estate investment plan. Your price range will depend on a number of factors, including the type of investment property you’re looking for and what kind of financing is available to you. You should not dive into real estate investing without having a clear idea of your current financial situation and an understanding of what wise investments look like for you. The Real Estate Financial Planner™ and The World’s Greatest Real Estate Deal Analysis Spreadsheet™ can help you crunch the numbers!
Now that you’ve decided what kind of investment property you want, it’s time to narrow that down even further. How much square footage do you feel comfortable managing? Do you want to rent out a one-bedroom, one-bath property or something bigger? This is a good time to think about the kind of renters you want to attract and what kind of maintenance or potential damage you feel comfortable planning for.
Are you looking for an investment property that could use a little TLC or are you aiming to rent out your property the day after closing? This will likely depend on your chosen investment strategy. Fix-and-flip investors love to be able to add value, and so if that’s the path you’ve chosen, you’ll likely want something that isn’t in its best condition now, but has plenty of potential. If you want to immediately rent, or you’re using the Nomad™ or house hacking strategy, then a rent-ready property may be more your speed.
What is your cash-on-cash minimum? “Cash on cash” refers to your return on investment after rent and without appreciation and other factors. For example, if you initially pay $50,000 for an investment property, and it generates you $5,000 a year, then that is 10% cash on cash.
To determine your cash-on-cash minimum, we highly recommend using the Real Estate Financial Planner™ and our Deal Analysis Spreadsheet. These programs can do a lot of the calculating for you, and they can help you plan for worst-case scenarios.
Word to the Wise
One thing to keep in mind? Once you’ve calculated your cash-on-cash minimum bar, don’t adjust it. It’s easy to let your standards on this keep sliding for properties you think are going to be a good deal, but it can come back to bite you. You’ve done the math — trust it. If you do consider buying an investment property below your cash-on-cash minimum, make sure you’re getting something back, like a big discount on the initial property price.
Return on Investment
Last but not least, determine your return on investment (ROI) standards. Your overall ROI on a property involves similar math to calculating your cash-on-cash bar, but this equation includes appreciation of the property, loan paydown, and more. You want to aim for a certain percentage of ROI not just in the first year of owning the property, but also in year five, year 10, and so on. The best way to set yourself up for success — and guard against fluctuations in the future — is to estimate this conservatively.
Talk to Your Agent
Now that you know what you’re looking for — or at least you have a few criteria to start with — talk to your real estate agent! The more specific about what you are looking for, the better property listings you will get from them. You should be in ongoing communication with your agent about what you want or need, as well as what you’re willing to be flexible on, so you can find the perfect properties faster.
Good luck! And to make sure you don’t need it, go to our library of real estate investing classes to get started.