272: Best of Fun Facts Friday – Choosing the Right Investment Property

SHOW NOTES FOR EPISODE 272: BEST OF FUN FACTS FRIDAY – CHOOSING THE RIGHT INVESTMENT PROPERTY

One of the most difficult decisions real estate investors make is in choosing the right investment property.  It is critical, especially in the beginning, that you fully understand how to select the best property for the best return.  In this episode, Bill will explore how successful investors select the right properties in the best locations.

It is the most important decision real estate investors make.  That is, determining what to invest in and where to invest.  It is critical, especially in the beginning, that you fully understand what you are looking for and where.  Otherwise, you will find yourself following multiple rabbit trails into all kinds of areas, asset classes and investment types – ultimately cost you a lot of money and much precious time.

On the “what to invest in,” there are many types of real estate investments.

• Single family vs. multifamily
• Fix ‘n flip, wholesaling or buy and hold
• Short-term AirBNB assets vs. one-year leases
• Deeds or leins
• Should I be a more passive investor, investing in other people’s projects or properties (such as through crowd funding, syndication or REITS) or focus more on an active strategy by buying and managing my own properties

You should be very clear, early on, on what you are investing in and why.  And it always goes back to your why!  Why are you investing in the first place?  What is the true reason for getting involved in real estate investing.  Is it strictly financial, or is it something more?

• Maybe you’re just bored in your retirement and are looking for something fun to learn and do, while making a little money on the side? Kinda like a hobby?
• Or maybe you’re trying to fill an income gap? You need another $500, $2,000, $5,000 monthly to achieve the kind of retirement you want?
• Maybe you just want to free yourself up from the 9-to-5 grind, retire early and travel and enjoy life while you still the energy and ability to really enjoy it
• Raise money for a specific one-time purchase?
  • Vacation home
  • 6 month world tour you always dreamed of
  • Help out your kids or grandkids with college, a wedding or first home?
• Maybe it’s to build a legacy to hand down to your family?
• Or perhaps it’s something deeper — you long for more meaning in your life – a greater purpose! You want to invest your time and resources in things that will help you make a difference in the world, in people’s lives or to serve God.

Whatever your reasons, be clear and write down your goals before you start spending your precious time and money.  There are a multitude of reasons you may be interested in investing, but you first must get to the core of your “why?”

Check out our episode #122 on  “The Importance of Knowing Your Why.”

Once you are clear as to what you are looking for and why – look at your end goal and work backwards to develop your strategic plan.  Also, ask yourself, “How much do I need by when?”  Clayton Morris, who was a guest recently on the Old Dawg’s Network Podcast (http://olddawgsreinetwork.com/discovering-your-freedom-number), says to find your “freedom number” (the amount you need to become financially independent).  Look at “how many houses or doors” you need to make that number.  And I would add to that – what ever your freedom number is double that amount.  Because, if your numbers are too tight, you are not allowing for economic shifts, vacancies, major capital repairs and other costs that can truly throw you for a loop – it’s what I call the Old Dawg Principle – “Plan for what you never even expect to happen!”  Whatever, your goal, look at the best way to get there and when you want it to happen.

For example, if your strategy is buying single family homes and you need $2,000 a month in additional monthly income, assuming, for example, that each door or home will cash flow $200 per month (on average), it would take 10 houses to make your goal.  How long would it take to acquire 10 houses and over what time period?  1-a-year for 10 years, 2-a-year for 5 years? 3 in one first year, followed by 2 in year two?   Or maybe you might just decide to it in less time by buying a 10-unit apartment building?

Whatever you do, he need to have a good understanding of your resources and be able to answer questions such as,“How will I get the money to do what I want to do and in what period of time?,”  How much available time do I have to accomplish my goal (only Saturdays, early mornings, late at night, when everyone is asleep, like our recent guest David Sweeney, the police lieutenant from Seattle – 179: Police Lieutenant’s First Rental Property Purchase is an Apartment Building, who did all his property searches at night).

And you need to factor in things like, for every 10 offers I make, for example, how many  will get accepted.  How much time will it take me to find 10 good properties – and you factor that into your plan and timeline.

Also, build in what I call “accountability factors” to insure you can I stick to your plan.  Set it in to your plan t sit down monthly, quarterly, etc. with a mentor or other accountability person, to review where you are at.

Once you’ve built the foundation, now you are ready to buy your properties.  Now, of course, I’m focusing on a buy and hold strategy here but you can adapt it to whatever your particular strategic plan is.

Now that you know your “why” and your “what,” you need to focus on your “where.”

Now, I always say buy close to home if you can and if it makes financial sense.  However, if the numbers don’t work and the market is not favorable, I would look elsewhere.   However, personally, I consciously choose not to buy near to where I live for a number of reasons:

• I don’t want a full-time job. I want to be a passive investor so I want to be as far from my properties as makes sense (keep in mind, this is not for everyone).  If I buy too close to my home, I just know myself well enough that if the property is nearby, I will be over at my property all the time (fixing things, upgrading, doing the work myself to save money, surveying the neighborhood, you name it)  I know, over time, I could see how I could easily get sucked in.
• Another reason is I like emerging markets. Now you may have an emerging market in your backyard – which would be awesome – but for those of us you don’t have that, it’s necessary to go elsewhere, which could mean out-of-state.  I like to find the best areas in the country where economic indicators are favorable so that, if I buy in that area, it will rapidly increase in value so I will have equity or, if I chose, I can sell and upgrade to a larger more profitable property.

You don’t need to be an experienced investor with deep pockets to make money in real estate. In fact, some of the most successful investors started out with small and simple portfolios. How invested you become depends on your why, long term strategy and the amount of time and money you are willing to commit.

If you have considered buying an investment property, it’s important to know that your options are endless. Here are four questions you should ask to identify your “where”:

1. What makes this location ideal for rental marketability?

People rent for different reasons.  Some are university grads looking to establish themselves in a city prior to becoming homeowners.  Or, like my son Elijah who is moving to a different state to go to college.  He is looking to buy a property and “house hack” so that he can live in rent-free AND generate some additional income at the same time.  His plan is to buy a fourplex, get a low interest and low down-payment FHA loan, rent out three units and have those tenants pay the mortgage, cover his rent and help generate additional income for him for school and personal living expenses.  And, as his first rental investment, move in a year, buy another and repeat, with the idea to leverage and eventually grow his won real estate portfolio over time.

Some investors may simply be looking for an affordable AirBNB property that they rent and sublet or buy and lease out. While short term rentals require a little more hands-on involvement, they can be incredibly lucrative.

In either case, you want to make sure that whatever you inverst in that the rental demand is strong in the area.

2. What are the rental properties like in the surrounding area?

Knowing your competition is one of the most important considerations when choosing an investment property.  How much are comparable properties renting for?  Is the vacancy rate high or low?  What condition are the other accommodations in, and how will your property compare?  Much like home buyers, potential tenants are doing plenty of research online before making a decision, and they have a better perception of value than ever before.  Get a good idea of what potential renters are expecting.

3. Is the home in good condition, or will it require rehab?

 Regardless of which market you are interested in, nicer homes generally attract nicer tenants. Good quality tenants will take pride in your place, but you need to give them something to be proud of.  If the property you are interested in is dated or requires some cosmetic updates, don’t be afraid to roll up your sleeves. Finishes don’t need to be fancy.  Choose durable flooring and cabinets.  A clean income property will attract the right kind of tenants to occupy your home.

4. Is this neighborhood headed in the right direction?

Most real estate investors have a long term plan in mind, but you never know when your plans might change.  It’s always wise to choose an investment property in a neighborhood that is likely to appreciate.  Look for historical sales data and drive around the area to observe the condition of the surrounding homes.  Good signs of an appreciating neighborhood are good schools, decreasing crime statistics, plenty of employment opportunities nearby, and surrounding homes that display pride of ownership.  Expect to pay a premium if you’re thinking of buying a home in a major city or vacation destination, but your additional rental income will make your investment well worthwhile.

5. Know Your Numbers

Having a great property in a great neighbor does not, alone assure a successful investment.  Make sure you understand the numbers and that they confirm that your property is in fact a great investment.  Remember, there is a big difference between buying a nice place to live and buying a smart investment.  The numbers have to work.

You need to know the relative ratios and metrics before you buy to position your investment for short and long term success.

Check out our 3-part podcast series on Analyzing Rental Properties.  There will be a link in our show notes at olddawgsreinertwork.com/blog.

6. Have a Good Exit Strategy

How long do you want to hold on to the properties?  3, 5, 20 years?  Indefinitely?  What do you hope to see when you sell?  Projected returns?

Do you plan to leverage your property to purchase other properties or just to cash-out once equity reaches a certain level?

Personally, I like to make money when I buy – not when I sell, but if you need to sell, you need to be prepared.  If you do not have multiple exit strategies in mind before you purchase the property, you can get yourself into a bit of a pickle.

Time is money, and if you are holding onto an asset, you are cash-strapped because all of your capital is in that asset. You might not hypothetically be losing money right then and there, but you are losing opportunity cost. You don’t want to be sitting on the sidelines doing nothing.

Do you have a plan if your long-term hold goes south because of economic or other factors that are out-of-your-control. What if the rental market dries up and home sales are horrible?  What are you willing to do?  Some of your options might be:

• Refinancing
• Wholesaling to other investors?
• Lease options or Rent-to-own?

These are a few of the key factors you need to carefully consider when choosing a rental property.  Before choosing a property make sure you have done your homework and clearly understand your goals.  Taking the time to buy smart and right will reap benefits for years to come.

This Episode Brought to You by Roofstock

This episode of the “Old Dawg’s REI Podcast” is sponsored by Roofstock, the first online marketplace created exclusively for investing in single-family rental homes with tenants already in place so you can start earning passive income right away.

Roofstock has put together a SPECIAL OFFER just for Old Dawg listeners who use the link Roofstock.com/dawg.   If you  sign-up today, you’ll save $350 when you close on your first rental property through Roofstock.  Offer valid for a limited time only.  Terms and conditions apply.

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