Start investing in Real Estate
My favorite aphorism when it comes to real estate is, ‘invest in the right properties in the right places at the right time’. So, what is the right time? ANY TIME is the right time. If you are not doing it right now, then you are wasting time and giving up on the time value of money. Pardon me if it sounds preachy but that is the truth. As for finding the right places, I have a whole blog article dedicated to it. Remember, at any time there is a place that is booming and someplace else that is stagnating or worse, going bust. For example, 200 years ago, New York was all the rage. A few decades later, Chicago and St. Louis popped on the scene and grew at vociferous rates relative to NYC. And then with the Gold Rush, San Francisco was THE place to be. Later, in the early 20th century, after the earthquake and fire at San Francisco, LA took the title. Anyways my point is that, at any time, there is always going to be a booming place thanks to a host of geopolitical and socio economic reasons (including taxation!!). Once you have identified those places (once again, check my blog) your next task would be to find the right properties. Allow me to show you how!
Also, mercifully, real estate boom cycles happen over a period of years. So you are more likely to experience somewhat higher stability than in a stock market filled with trigger-happy day traders.
How to find the right investment property?
If only Aladdin’s Genie was working for you, how easy this would have been. But most of us don’t have one. So let me list out all the factors and what filters you need to apply for those factors in order to make your life simpler in your search for the right properties.
If you don’t have the time to read this blog, watch this 1.5 min video. I know 7 mins is asking too much especially when you are accustomed to 20 sec TikTok videos but bear with me as I do have some interesting insights to share.
Factors to consider when searching for the right properties/selecting the properties….
- Home Price: What price range should you be targeting?
Often, first time investors have this misconception that luxury houses/high priced homes fetch high rents and naturally they are better investments. But the opposite is mostly true. The rents may be high for high-end but the rental yields (i.e. rents divided by value of homes) are generally lower than those of mid-priced or low-priced homes. And as an investor you need to look for higher rental yields; not for higher rents. Also, the luxury properties have a higher chance of being vacant, further reducing your returns.
Tip: once you have chosen an area, look for homes in the range ∓ 20% of the median home price for that region. This middle of the road approach also will land you affordable properties that you can sell relatively easily in case you are trying to flip.
- Home Type: Should you buy a single family home or condo for investing?
Single Family Home vs Condo/Apartment vs Townhome
If you like stock market analogies, here is one. Single Family Home is like a growth stock whereas a condo is like a dividend stock. In a single family home, a higher part of the price you pay goes for the land beneath the structure than in a condo. And since land is an appreciating asset and structures are depreciating assets generally speaking, a single family home is very likely to get higher price appreciation than a condo. On the other hand, condos usually fetch better rents for the same price resulting in higher rental yields. So, whether you want to buy condos or homes is a matter of trade-off between rental yields vs capital appreciation (i.e. dividends vs growth), with the townhomes falling somewhere in between.
When you are buying condos for the objective of renting them out, keep an eye for the HOA dues. HOA fees can eat away a big chunk of your rental returns, especially in luxury condos.
- Neighborhood: What should you consider when investing?
Here are some key things to consider when you are choosing a neighborhood to invest in.
- Local Jobs & Economy: As James Carville once famuosly said “It’s the economy, stupid”, it really all boils down to how good the local economy is. Are there enough jobs? Are new employers and people moving in? Is it a hot area?
- Infrastructure & Connectivity: Development will not happen unless there is good infrastructure in the locality. How well is it connected to nearby regions, etc.?
- School District: Are the schools in the neighborhood reasonably good?
- Bedrooms & Bathrooms: How many bd/ba should investment properties ideally have?
A low risk investment property would ideally have between 2-3 bedrooms and a commensurate number of bathrooms. And stay away from properties that have skewed bedroom/bathroom ratio. Look for properties that have an equal number of beds & baths or have a maximum of one bed without a bath. If not, you will have a really tough time renting out properties with 4 bds for 1 bath or even 3 bds for 1 bath.
- Condition of the Property: What all should you look out for for
Although a detailed inspection will tell you all about the property, you should strive to figure out atleast the following when trying to shortlist properties.
- Age: If the property is less than 15 years old, you are in, generally speaking, good hands. If not, find out when each of the following was replaced
- Roof/AC/Structure: Roofs last anywhere between 15 – 50 years depending on the type and local climate whereas AC last between 10 – 15 years. If the home is old enough, check when roof & AC were last because they are often the biggest expenses.
- Inhabitable: Look at the photos to do a basic gut check as to whether the properties are inhabitable or not. Unless you are in the business of fixing and flipping properties or have enough cash to repair them back to habitability, stay away from uninhabitable ones because very often bankers will hesitate to finance.
All these tips for finding the best investment properties are in addition to the factors you need to consider when choosing the region. Although finding the right region to invest plays a big role in getting you the best returns, do not worry if you have already set your eyes on a region that is not exactly among the top places to invest in. For example, you might want to invest in a particular area due to personal reasons such as wanting to settle down there or to be close to your family. If that is the case, remember that it is always possible to find good investment properties within any region when you do enough research. So, do your homework with the help of above pointers and tips before investing. Happy Property-Hunting !!