Every serious real estate investor is looking for the simplest way to make the greatest profit, which depends highly on finding and selecting the real estate location that is highly desirable for your target customers. This article will guide you through selection considerations, provide key information on financial calculations, and point you to resources for finding the best real estate location for you!
As in any other business, supply and demand are extremely important to a real estate investor. Smart investors focus on securing properties that are in-demand but are in low supply to the target customers. This strategy allows your price points to be high and vacancy rates or time on the market to be low, which delivers the greatest profit.
Investing in the property that is right for you will be more efficient by following these criteria.
- Choose your investment strategy, such as flipping single-family homes, renting multi-family real estate, or wholesaling.
- After determining your general market (Dallas TX Area, for example), narrow your search to the neighborhood that offers properties that match your investment strategy. If you are searching for rental properties, for example, you need to know the cash on cash return, expected income (search com), occupancy rate (check out mashvisor.com) and capitalization rate (typically referred to as “cap rate”).
- Consider population trends. If the population is on an upward trajectory, find out why. Contributing factors may include job growth, housing affordability amidst the growth, and personal preferences such as topography, weather, nearby shopping options, parks, and walking trails.
- Research tax rates, including high income taxes and high property taxes (search the local government website).
- Look for safe neighborhoods. You can see a visual of the safety ratings of any neighborhood at com. I also suggest you consider driving the neighborhood at different times of the day and night, checking with the local police, and speaking with residents.
- Get information about recorded covenants, conditions, and restrictions (CCRs) from your closing attorney or real estate agent. These rules outline what residents of the community may and may not do, such as allowing or not allowing property owners from renting their property! If the property you are considering is a part of a Home Owners Association (HOA), find out if property owners are required to pay dues and if so, how much the dues are annually.
- Learn about the local schools. Every family with school age children is looking for the best school possible. There are several websites that offer information under the search term “find the best school in my area.”
- Do residents in your target neighborhoods typically use public transportation? If so, what means are available and how accessible are they to the neighborhood?
- Check out local laws such as property taxes, public services (water/sewer access, police and fire station service, trash pick-up, etc.) and any regulations specifically affecting real estate investors.
After selecting your target neighborhood/s, look for the best properties that meet your criteria.
Here are a few resources that have been helpful to many other investors.
- Check the Multiple Listing Service (MLS), which lists properties for sale by multiple real estate brokers around the US. A simple way to do this is to search com.
- Drive the neighborhood to find “For Sale” signs and follow up with the realtor listed or the owner if the property is For Sale By Owner (FSBO).
- Tell everyone you know that you are searching for a certain type of property. Clearly and concisely describe your desired property to seek referrals and leads. Write a one-liner to share with people who may be able to help you which includes the neighborhood, the price point, and the type of property you wish to purchase. Paint a picture for those who may be able to refer you to properties. “I’m looking for single-family homes that have approximately 1,500 square feet in the Fair Park section of Dallas for $120,000 or less” is one example.
- Use traditional and updated marketing to bring sellers to you. Checking the classified section of the newspaper is an example of traditional marketing whereas having a blog with a large following is one updated marketing strategy.
- To simplify the process, hire a real estate agent that works with investors. Typically this would be a realtor who has personal real estate investment experience as well as experience working with real estate investors, is happy to make multiple offers (in the same day, if needed), and is local to the geographic area you have selected. Obviously any realtor you choose to work with needs to have a great reputation with other realtors and is known to be a person of integrity.
Once you have located several prospective homes, you need to know which one to buy.
Analyze and compare your prospective investment properties to determine income potential for the different properties you located by using these calculations.
- Net operating income – Net operating income (NOI) is a calculation used to analyze real estate investments that generate income. Net operating incomeequals all revenue from the property minus all reasonably necessary operating expenses. NOI is a before-tax figure that excludes principal and interest payments on loans, capital expenditures, depreciation and amortization.1
- Cash flow – income minus expenses (as described above) including loan costs (usually a mortgage)
- Depreciation – income tax deduction allowing recovery of the cost of purchased property or assets used in the business
- Rent/Price Ratio – median price of homes in your desired neighborhood divided by the median annual rent. A lower price to rent ratio is preferred.
Business investment is about profitability. Real estate investing requires you to be extremely careful about selecting the type of investment and its location then actually finding options that meet your criteria. After running the numbers on multiple properties, you can make a good business decision as to which real estate property is worthy of your investment dollars!
Gaylene Rogers Lonergan | Board Certified Residential and Commercial Real Estate Attorney | The Lonergan Law Firm | firstname.lastname@example.org | 214-503-7509
Call 214-503-7509 and ask for Moe to schedule a consultation.
1Investopedia: “Net Operating Income”, (2018, Dec. 12). Reviewed by Will Kenton.. https://www.investopedia.com/terms/n/noi.asp
© Gaylene Rogers Lonergan and Lonergan Law Firm, PLLC, 2017-18. All rights reserved. This article is provided for educational reasons exclusively and is not meant to be construed as legal advice. The Lonergan Law Firm, PLLC, will represent you only after being retained and that agreement is made in writing.