How to Choose the Right Investment Property

The real estate market has been on fire in 2021 as sale prices and rental rates are reaching all-time highs.

Many investors are wondering how they can still find and buy profitable investment properties with higher prices and greater competition.

The good news is that there are still plenty of good investment opportunities out there for savvy investors. The bad news is that they’re harder to find with the increased demand for residential properties.

If investors are going to be successful in this market, it’s imperative they know what they’re doing and what properties they’re looking for. Gone are the days of stumbling across great rental investment properties.

Succeeding in this market will require investors to research, have discipline, and be patient. By following the tips below, you’ll be well on your way to finding the right investment property for you.  

1. Create a Strategy
2. Market Conditions
3. Property Financials

1. Create a Strategy

The most important step you can take to find the right investment property is to create a strategy.

If you don’t know what type of property you’re looking for or how you’ll monetize it, it’s nearly impossible to identify the right property when you see it.

Some investors fall into the trap of chasing a property because of how they “feel” about it, often ignoring the red flags other investors see. Don’t let that be you!

If you have a solid strategy, you’ll be more likely to find what you’re looking for. Here are some questions to consider when creating your investment strategy:

Type of Property: What type of property would like to buy? This could be single-family homes, duplexes, multi-family buildings, or even apartment buildings.

Time Investment: How long will you own this investment? Most investors see this as either short-term (less than five years) or long-term (more than 5 years.)

A popular short-term strategy is to fix and flip. A popular long-term strategy is to buy and rent out a property.

Monetize: How (and when) will you make money from the property? If you flip a property it’s imperative you sell it quickly to protect your profit.

If you rent out a property, it’s ideal to have it be cash flow positive right away so you can instantly start building cash flow.

Having answers to these questions will help you understand the type of property you’re looking for to best fit your strategy.

2. Market Conditions

Now that you have a clear investment strategy, you’ll need a better understanding of the market conditions in area you want to invest.

Most of these conditions are based on trends, so it’s good practice to view them from that perspective.

Population: Is the population of your target area increasing or decreasing? An increasing population could signal that the market is healthy and there is a consistent influx of potential tenants for your property.

On the other side if people are leaving the area it could mean that you might have a hard time renting your property since the area is less desirable.

Price: What are the home prices and rental rates in your target area? Generally, a consistent upward trend in housing prices and rental rates shows price stability and cash flow protection.

A downward trend in prices and rental rates in an area should be a red flag to investors. Not to say you shouldn’t invest in that area, but further research should be done to figure out whether the area is still a viable investment.

Business: Is business growing or shrinking in your target area? If businesses are opening or expanding, it can signal that the area is thriving, and more jobs will be created.

However, if businesses are closing in the area, it could decrease the demand for housing and hurt your rental rates and resale value.

This isn’t a comprehensive list of all market conditions to look for in your target area, but it will give you a good picture of an area’s trends that tend to affect investment properties the most.

3. Property Financials

Once you’ve found a property in your target area you’d like to invest in, you’ll need to evaluate the financials of the property to ensure it can make you money.

If it doesn’t meet certain requirements, it may indicate the property isn’t the right investment for you.

The 1% Rule: Can the property be rented out for 1% of the purchase price every month? If so, it could be a good investment. Investors often use this metric as the minimum standard for qualifying a property.

The 50% Rule: Managing your expenses is just as important as maximizing your monthly rental rate. The 50% rule can help you estimate expenses. It assumes that 50% of the income from your rental will go towards expenses.

This metric can help you understand how much revenue will be left over after your expenses have been paid.

These financial measures can help weed out properties that may not be the best rental investment opportunity. If the rental property you’ve found meets these standards, it could mean that it’s a good investment.

Final Thoughts

There are several factors to consider when choosing the right investment property. It can seem like a daunting task to find a profitable investment property in this market with high prices and increased competition.

But if you do the research and stay disciplined and patient, you’ll eventually find the right investment property for you.

If you’re a rental investor and don’t want to manage the day to day operations of the property (or properties), find a management company that offers property management services.

These services will turn your rental business into a truly passive income stream that you hardly ever think about.