Whether it’s your primary residence or a rental property, investing in real estate is a great way to build equity, reduce your overhead, and, ultimately, generate a profit. That said, if you want to increase the likelihood of profitability, you have to understand what to look for in an ideal real estate investment. As interest rates rise and home prices continue ebbing and flowing, finding the best real estate deals can be challenging. Even if the list price is right, the deal might not be suitable for you. Let’s explore some of the characteristics that make a real estate deal more intriguing.
Look for real estate deals in places where people want to live and need housing. This ensures that you will be able to resell or rent the property either after you buy it or in the future when you’re looking for a second home. Indicators of a quality investment location include:
- Low crime rates
- Job opportunities
- Population growth
- Nearby amenities
- No zoning issues
- Future developments
- Safe from natural disasters
Low Listing Price
A low listing price almost always signifies a low monthly payment and not just for principal and interest. Most homes with lower listing prices also have lower operating costs and property taxes, because they tend to be smaller, older, or need repairs. If they require updates, however, it’s important to understand when a low listing price indicates substantial damage that costs more than the property is worth.
High Rental Income
If you plan to rent out the property, you need to make sure the amount you can charge for rent is equal to or greater than your monthly payment. Look at the rental prices of similar properties and hold yours to the 1% rule. This states that the monthly rental price should be equal to or greater than 1% of the total purchase price of the property. For example, if you’re looking at Western Colorado golf course properties and find one listed for $400,000, you would need to be able to rent it for $4,000 to ensure optimal profitability.
Good Cap Rate
Capitalization rate (cap rate) is another metric you can use to determine the profitability of a rental property. The cap rate is a ratio between the annual rental income and the current market value of a property. Generally, you should strive for a cap rate between 8-12%.
Low Repair Costs
To save money upfront, you may want to find an investment property that needs repairs, but none so substantial that they cut into your bottom line. Repainting some outdated walls is a lot easier and less expensive than redoing the plumbing. To learn more about which repairs are worth your time and money, check out this other blog post titled, “How Much Will You Actually Get Back From Your Home Improvements?”
How To Find Good Real Estate Deals
Before you hop on Zillow or another property search database and sort from price low to high, consider contacting a local real estate agent in your desired area to help tailor your search to match your real estate goals. Maybe you want to purchase a home, live in it for a few years while you renovate it, and rent it out. Or perhaps you’re ready for a third or fourth rental property. No matter your real estate situation, a knowledgeable broker can find the best deal for you, and that looks different for everybody.