Do you know how to spot a real estate opportunity? Can you spot a “time waster” property before you pay out for surveys?
Initially, it can be more difficult than you might think. This is especially true when looking at two of the same kinds of property on the same street. How can you quickly compare the merits of both in terms of financial return?
This post aims to show you how to spot real estate opportunities quickly and easily, allowing you to move on from duds and choose properties to investigate more thoroughly.
Why Invest in Real Estate?
Investing in real estate is growing in popularity and is widely considered to be a better choice versus stocks when it comes to return on investment (ROI). People also enjoy the control over their cash when investing in property. As the landlord, you can choose whether to upgrade a property, raise the rents, etc. You are the CEO. There are also tax advantages to investing in real estate over stocks, and a house is, of course, a tangible asset.
But, in the recent times of economic change people are beginning to panic and the market is changing. This is the perfect time for great entrepreneurs to strike. Look for an opening in the confusion and buy when sellers are nervous about the value of their home.
There are also benefits to be found in certain tax rules, so investigate the aspects that appeal to you and your goals. A financial advisor may be able to assist you with this.
Indicators of a Good Real Estate Opportunity
1. Accelerating home prices in one particular area compared with other surrounding areas is a sure sign that things are changing in that location; try to catch this trend early to make the most out of the upward growth.
2. Look for early signs of development in an area, for example, land clearing, construction of roads, widening of lanes, etc. Spotting early signs of growth in a town is a great way to keep abreast of changes in housing prices before other investors sweep in.
3. Visit the town hall to find out about major projects in the area and details of upcoming developments. This can provide you advanced notice that an area may soon experience declining housing values.
4. Look for the construction of new schools and shopping centers in an area. This indicates that new people will start to take an interest in the location.
“When buying a property to live in, you should always check the surrounding schools, and the same goes when buying an investment property. Good school districts often mean a more stable housing environment, which can play an important role when you eventually decide to sell. Plus, they might act as a draw for tenants that have or are considering a family.”
5. Investigate the tax structures of an area. Sometimes two almost identical locations can demonstrate a striking difference when it comes to housing prices, and this can sometimes be due to the tax structures. The lower tax location tends to be more desirable. With a little further investigation, you can find out when an area is due to be reassessed … a useful bit of information.
6. Identifying the ratings of the local schools is a great way to determine if an area will attract buyers. Parents are often governed in their real estate choices by the results of the schools in the area.
7. Another factor to watch out for is whether a town has become either overpopulated or overpriced. In these instances, it is useful to start watching the outlying areas, analyzing early signals of growth in the outskirts.
8. Once you have identified opportunities within a particular area, it is still useful to know how to find which properties within your chosen zone could be investment opportunities. The following quick calculations can narrow the pool further, allowing you to uncover a real estate gem.
Quick Calculation for Rental Income
Below is an overly simplistic but useful calculation to implement when narrowing down properties. It will give you a rough idea of how much rental income a property will command.
2% of the purchase price = rough estimate for rental income
This is not to be used as the final rent, but it will give you a ballpark figure. You should know if a property is worth considering for rental or not in a few seconds with this figure.
Quick Calculation for Profit from Rent
The next way to identify if you are looking for a good real estate opportunity is to determine the amount of the rental income that will reach your pocket. Below is the calculation.
50% of the rental income should go to expenses, not including mortgage payment.
The remainder is your income.
Once again, this is overly simplified but it is helpful for quickly spotting opportunities. The expenses include repairs, builds a buffer for times of vacancy, taxes and insurance. Fifty percent seems high, but landlords nearly always underestimate how much they should set aside.
The remaining 50% of the rental income should pay the mortgage repayment and remainder is your “passive income.” Most landlords are satisfied to receive $100-$400 per month from each unit.
When Is a Refurb a Good Opportunity?
One type of property that catches the most entrepreneurs out is the “fixer-upper.” The asking price is usually nice and low and surely it will only need a bit of work … right?
It is nearly always not as simple as that. The first thing to do before even considering a property that needs to be refurbished is to accurately estimate the after repair value (ARV).
“It is vital to estimate the ARV figure as accurately as possible, as it is one of the most important determinants of the profit you will make with your investment.” (Landlord Station)
This means walking around the place with a trusted contractor and obtaining a quotation for the materials you will need and the labor required to make it happen. You should also find out how long the updates will take as that will affect how long your property will stand vacant.
Quick Calculation for Fixer-Uppers
Once you have the ARV of a property requiring refurbishment, you can apply this overly-simplified but useful calculation to decide if you are looking at a good opportunity or not.
70% = the maximum purchase price you should offer, based on ARV minus repair costs.
You will find this calculation rules out several properties you may be considering.
Purchase Price Is Everything
Never forget when buying real estate that the profit is made at the point of purchase. Be sure to stop your emotions from getting in the way when you are buying investment property; this is not your personal family home.
Decide on the exact criteria you are looking for in your real estate, keeping your “shopping list” handy as you search to avoid being sidetracked by something that is almost right. Do your research so that you know what is on the local market and how much property is selling for right now. Be aware of the trends and stay focused.
If you haven’t enlisted the expert services of a real estate agent, you will have to learn to find a seller that is motivated to sell. This could be the deciding factor on whether you make money or not. The earlier comment about taking action during economic unrest comes into play here. Nervous homeowners may be more likely to sell for under market value.
Whatever happens, do not overpay! You should always aim to purchase investment property for below the market value and let your head govern the final decision.
Summary
Finding a good investment opportunity in real estate may not be as difficult as you initially think. There are a few key indicators of growth in an area you can look out for and with these, the earlier you can act, the more potential for profit.
Accelerating home prices in one particular area compared with other areas surrounding it, early signs of development (e.g., land clearing and construction of roads), town hall announcements about major projects in the area plus the construction of new schools and shopping centers are important signals when deciding to purchase property. It is also useful to watch for towns that have become overpriced or overcrowded and begin to analyze the growth of the outskirts.
The calculations shared here are overly simplified and are meant to be used as tools to enable you to quickly sift through the properties on the market to find the potentially great opportunities hidden amongst them. With these to hand, you can think clearly and quickly make decisions without wasting time on non-profitable investments.
