Knowing how to find good investment properties is one of the most important things investors need to do to increase their chances of success.
Table of Contents
- Are Real Estate Properties a Good Investment?
- What Kind of Properties Are Best to Invest in?
- How to Determine a Good Property Investment
- Top 10 Tips for Finding and Buying a Good Investment Property
- Wrapping It Up
Investing in real estate doesn’t always guarantee financial rewards. Just because you get into it doesn’t necessarily mean you will reap financial success. There’s a lot more to it than meets the eye.
Seasoned real estate investors, as well as industry experts, will tell you how crucial finding the right investment property is. The right investment property can give you great success in as much as the wrong one could be disastrous.
In this article, more than just knowing how to find good investment properties, we will also discuss other related matters. You will learn why investing is a good idea in 2022, as well as how to determine which properties make for good investment options. They are important for both newbie and seasoned investors as they will increase your chances of investing success.
Are Real Estate Properties a Good Investment?
Absolutely! One of the best ways to build wealth and equity is investing in real estate properties. Of course, it entails finding good investment properties for you to really say you did well. However, whether you choose to invest in physical real estate or alternative investments, it is highly likely that you will get a good return on investment.
Currently, the real estate industry is in great shape despite the ongoing pandemic. Sure, COVID-19 adversely affected the industry for most of 2020, but things took a turn for the better in Q4 of that same year. Fast forward to today, despite the coronavirus still looming over us, the industry is on the rise in the US.
According to the National Association of Realtors (NAR), the total number of home sales in the country rose to 6.76 million units. That’s a huge 22.2% jump from pre-pandemic 2019 and is the highest annual growth rate since 2006.
2021 was a great year for homebuyers and investors as we experienced historically low interest rates. The average rate for a 30-year fixed-rate mortgage was only 2.65% as of January 2021 and 3.65% as December 2021 ended.
Mortgage rates, however, went skyrocketing to 5.70% at the end of June 2022. It’s been declining ever since, with the 30-year fixed-rate mortgage closing at 5.30% as of the first week of July. Experts and industry insiders expect the 2022 US housing market to end the year with a mortgage rate between 5% and 6%.
Despite the upward trend, mortgage rates today are still within the average American investor’s reach. It makes real estate investing a viable option for investors.
Related: The Ultimate Guide to Real Estate Investing for Beginners
Why Should You Invest in Real Estate in 2022?
Here are a few reasons why investing in real estate is good for you:
Recurring Income
How much you make off your investment will depend on your investment strategies. Most real estate investors know how to find good investment properties and convert them into traditional or vacation rental properties.
While other approaches, such as fix-and-flips and micro-flipping, can provide good returns, you will need to put in more time and effort for each project. Unlike the two, rental properties give you recurring income on a much more regular basis. It, in turn, improves your cash flow on your income property.
Appreciation
Historically, real estate appreciates over time, especially as a buy-and-hold investment. The Federal Reserve reports that as of Q4 2021, the median price of properties sold in the US has increased by more than 238%. This is over a 20-year period or since Q1 2001.
Diversification
Often, you will hear investors talk about not putting all your eggs in one basket. It simply means diversifying your investment portfolio and going beyond the typical stocks, mutual funds, and bonds. Real estate properties are good investments to diversify your portfolio and give you tangible assets.
Inflation Hedge
Another advantage of investing in real estate properties is they are great at mitigating the effects of inflation. The reason behind this is that the real estate industry generally is not correlated to the market’s movement.
Also, real estate prices usually go higher at a faster rate than inflation. Even rental property owners cope with higher operating costs by increasing their rates.
To support the above statement, MacroTrends reports that between 2001 and 2020, inflation rates in the US totaled just a bit above 41%. On the other hand, median property prices for the same period went up by about 238%.
Tax Benefits
One of the best things investors get from real estate investing is the tax benefits. It offers numerous good ways to reduce your taxes. Here are some of the most common tax deductions on rental properties:
- Property management and leasing fees
- Property taxes and insurance
- Maintenance and repairs
- Mortgage interest
- Related owner expenses (continuing education, travel, etc.)
What Are the Drawbacks Involved in Real Estate Investing?
Like any other investment, real estate also comes with its share of drawbacks. Here are some of the most common ones:
Requires Greater Capital
One of the biggest challenges you will ever face as a real estate investor is funding your investment. Real estate investing requires substantial capital, and not everyone has enough extra cash lying around to buy properties.
In most cases, investors need to find financing options to purchase investment properties. When it comes to financing, you also need to know how to find the right option that will not be a burden to your financial situation.
You will also need to find a way to make a bigger down payment to keep your monthly mortgage payments lower. Investors typically pay a minimum of 25% down payment of a property’s selling price.
Can Be Time-Consuming
While investment properties are a good source of income, they can take up a lot of your time. Rental properties, specifically, will require you to be very hands-on if you expect to make a good cash flow from them. On top of running the day-to-day operations, you also need to:
- Stay updated with market trends
- Be knowledgeable about fair market rent
- Perform routine check-ups
- Carry out repairs and updates when needed
- Manage your finances
Not Liquid
As an investment, real estate properties cannot be quickly sold and converted into cash. Even if your property is in a strong seller’s market, it will still take you around 30 days to list your property on the MLS, negotiate, and close the deal.
You cannot sell the property at a fair market price quickly, especially if you’re in a tight spot and need the cash badly. It is why building an emergency fund before you make an investment is crucial.
Liability Risks
As a rental property owner, you are responsible for ensuring that your property is safe to live in. Otherwise, you run the risk of being sued by a tenant, guest, or contractor who gets injured on your property.
To lower the liability risk, you can purchase a landlord insurance policy. You may also require your tenants to get a renters insurance policy if the local landlord-tenant laws allow it.
What Kind of Properties Are Best to Invest in?
Now that you already have an idea of what to expect when it comes to real estate investing, what properties should you consider? Knowing which types of real estate investments are profitable is a part of knowing how to find good investment properties.
Rental Properties
If you want to know how to find good investment properties, you need to look no further than rental properties. Whether it’s a long-term or short-term rental property, you can get a good ROI, especially if you’re in a hot market.
Traditional rentals give you income on a more regular basis, while Airbnb rentals provide greater earning potential. Both rental types give you certain tax benefits as well. The only downside to owning rental property is it is subject to seasonality.
Generally, the demand for rental properties soars during spring and summer while they drop during the colder months. You are also at the risk of getting bad tenants, which, depending on the state you’re in, might not be good for you since not all states are landlord-friendly.
It is why locations play a crucial role in rental property investment. Knowing how to find good investment properties also means knowing which markets are good for rental property investments.
Distressed Properties
One investment strategy that a lot of real estate investors implement is to buy distressed properties, rehabilitate them, and sell them at a profit. House flipping can be quite profitable when done right, especially if the subject property is in a very desirable neighborhood.
One of the downsides to it is it requires you to be more hands-on with the entire process. It also is quite expensive since you must factor in closing costs and home improvement expenses.
Commercial Real Estate
Commercial real estate is another type of real estate investment that can be quite lucrative. A lot of real estate investors go into commercial real estate because of its income-generating potential. Commercial property owners also maintain a good professional partnership with tenants in making each other’s business better.
The downside is obviously that it is a lot more expensive than a residential property. Plus, you can’t just DIY everything since it will be used for business. You need the help of licensed professionals to handle all of its maintenance issues, which is an added cost.
Indirect Investments
Investing in real estate does not always mean buying a physical property. You can get into real estate investing without owning a tangible asset, as there are alternatives available. You can invest in REITs, real estate crowdfunding sites, and other similar non-conventional investment options.
Related: Real Estate Investing for Beginners with No Money: Is This Possible?
How to Determine a Good Property Investment
Knowing how to find good investment properties entail figuring out what makes them profitable in the first place. To help you spot which properties are suitable for investing in, here are some aspects you need to consider:
Neighborhood
One of the most important things about knowing how to find the right investment properties is finding the right neighborhood. The neighborhood you buy in will determine the type of tenants you will get. It will also affect your vacancy rate.
In choosing a neighborhood, make sure that it is desirable to people. The economy must be strong, with plenty of open businesses operating. It should also be accessible to public amenities and must be safe and secure.
Tax Rules
Property taxes vary depending on the state you’re in. You need to know how to properly assess a location based on its tax rules. Not all high-tax states are bad, especially if you’re in a great neighborhood that attracts long-term tenants or with high occupancy rates for vacation rentals. However, there are also a lot of undesirable places that have high tax rates, so you need to find out which ones to stay away from.
To do that, you need to perform your own research. Talk to the people in the community or get connected with a real estate professional who knows the area very well. These people can answer your questions and address your concerns as far as property taxes go.
Public Safety and Security
As mentioned earlier, safety is an important element in finding the right neighborhood and property to invest in. Nobody wants to live in a crime-infested neighborhood. So even if the cap rate or cash on cash return is high in a particular area but is deemed unsafe to live in, it won’t do you any good as an investor.
Ask around first to give you an idea of how safe a neighborhood is. You can go online and search for crime rates for whatever city you’re considering. Such a process is part of performing due diligence in real estate investing.
Educational Institutions
Another factor that will make your investment a huge success is if it is found in a spot with an exceptional education system. Areas with good public and private schools are attractive, especially to couples with young kids. Reputable universities and colleges also attract college students to a place that makes investing in rental properties a viable option.
Job Market
The local economy is something you should also consider. Locations with a growing job market are very likely to attract in-migrants. In most cases, places where the job market is growing and the economy is booming experience a huge increase in demand for rental properties.
To know which locations are thriving economically, you need to keep yourself updated with news of major companies moving to an area. When this happens, housing and rental prices go up.
Amenities
One of the tips we can give you about how to find a good investment property is to take a look at what amenities are available in the area. Are public amenities like banks, restaurants, shopping centers, parks, libraries, and public transportation easily accessible? They are some of the things that add value to your investment since they are likely to attract more tenants.
Future Developments
Lastly, you also need to consider what the future has in store for a certain location. Depending on your investment strategy, it may not be wise to sell an investment property quickly. In most cases, holding on to a property for a long time will prove beneficial. If you’re one of those folks who do not plan to sell fast, you need to consider what the plans are for the location you’re in.
If there’s plenty of construction going on, it is a good indicator that there is economic growth on the horizon. However, in the same breath, some new developments can hurt your property and its value. So, carefully take into account future developments when looking for the right investment property. It is how to do real estate investing right.
Real Estate Comps
The question of how to determine if a property is worth investing in can be answered by real estate comparables. Real estate comps are properties in the immediate vicinity that have nearly the same qualities as a subject property.
Investors use real estate comps to determine how a subject property stacks up against other similar properties in terms of price. It will be wise to learn how to use real estate comps, especially rental comps, if you plan to start a rental property business.
Real estate comps allow investors to a subject property compares against other similar properties in terms of price and other features.
Top 10 Tips on How to Find Good Investment Properties
Here are some tips on how to find good investment properties:
1. Set Your Investment Goals
Before you go figuring out how to find the best properties to invest in, you need to first set some clear investment goals for yourself. Ask yourself what you want to get out of investing.
You need to be clear about what you want for yourself. Having a clear set of goals will help you determine which steps to take as an investor.
2. Talk to People About Potential Investment Properties in an Area
The thing about real estate investing is that you need to have a good network to know where the profitable properties are. You need to know how to connect with the right people in the industry.
Real estate agents, brokers, and other investors are some folks who can help point you in the right direction. Reach out to them and get as much information as you can.
3. Determine the Amount of Money You Will Need to Purchase the Property
Take an honest look at your financial situation. Do you have enough extra money for an all-cash transaction without compromising your other priorities? Or will you need financing to make the purchase? Having a clear picture of where you stand financially will help you determine how much money you actually need not just to buy the property but to make the necessary updates and repairs to get your rental business off the ground.
As far as financing is concerned, you need to know how to look for the right lender. Shop around and weigh your options. Consider the long-term effects like mortgage rates and refinancing options.
Talk to lenders and real estate professionals and ask them the hard questions. Once you get a better idea of your financing options, it is a lot easier to look for properties that will not be a huge financial burden to you.
4. Have a Clear Vision of Your Ideal Renter
Now it’s time to think of the person you would like to rent to. Think of it as an avatar of sorts. The renter you have in mind will give you an idea of what neighborhood to consider.
If you want a young couple with children, then a place in the suburbs or something similar might be the best investment option for you. Perhaps you have college students in mind as your primary renters. Looking for a property near a university or college will be the best strategy for you.
5. Avoid Fixer-Uppers
The goal of real estate investing is to make money, not to lose it. Investing in fixer-uppers will eat up a lot of your reserves on repairs and updates. Unless you’re in the fix-and-flip business and you can afford costly home improvements, avoid properties that require a ton of work.
6. Perform Due Diligence
We cannot stress enough how important due diligence is in real estate investing. Arming yourself with the right information and data about a particular neighborhood or property will lower the chances of failure.
You just need to know where to look for relevant information and how to crunch the numbers to make sure you still turn in a profit at the end of the day.
7. Start Your Property Search With a Real Estate Platform
While you can still go about the traditional way of looking for investment properties, it may already be counterproductive to your goals. It is costly and inconvenient to drive around town asking people for leads. Not to mention, it can also be very time-consuming.
The best way to search for investment properties now is by knowing how to use technology to your advantage. This is why a real estate platform like Masvhisor exists.
Mashvisor is a website that helps investors like you find investment opportunities that are right up your alley. Its massive database covers almost all real estate markets in the US today. It makes the search for the right property a lot easier and simpler. All you need is to enter your desired location in the website’s search field and it will do the work for you.
Mashvisor’s property search feature will help you identify which neighborhoods are ideal for investment with its real estate heatmap. You can set different filters to highlight neighborhoods in an area according to their listing price, cash on cash returns, rental income, and Airbnb occupancy rate.
On top of that, Mashvisor’s investment property calculator also makes life easier for you when you compute a property’s profitability. It factors in actual real estate comps drawn from reputable sources to give you a highly accurate ROI projection for a subject property.
To learn more about how Mashvisor can help you find profitable investment properties, schedule a demo today.
8. Figure Out How Much Your Expenses Will Be
Once you have your list of properties narrowed down to a handful of picks, determine how much you will need on top of purchasing the property. Factor in your utilities, repairs, maintenance, HOA fees (where applicable), taxes, insurance, and property management expenses among others.
Prudent investors and real estate professionals estimate that 50% of your investment property’s income will go to expenses. You may go online and use some free rental property calculators or you can simply just use Mashvisor’s rental property investment calculator.
9. Consider the Appreciation of the Property
When it comes to property appreciation, there are two kinds you should know about: forced and market. Knowing how to differentiate one from the other will be quite helpful in this case.
Forced appreciation takes place when you buy a property and make improvements to it to increase its value. On the other hand, market appreciation happens over time when the neighborhood improves and goes up in value.
It is why knowing how to look for the right neighborhood is important. Even if you don’t do many updates on a property, because you’re in a good neighborhood, appreciation is inevitable.
As far as appreciation is concerned, always look for a property that can generate a good positive cash flow regardless of the type of appreciation.
10. Find Out What the Cash on Cash Return Is
While most investors use a capitalization rate to determine a property’s potential for profit, a cap rate formula assumes that the property is purchased in all cash. As we already mentioned a while ago, not everyone has enough extra cash to make an all-cash transaction. This is why using a cash on cash return is better than a cap rate. The cash on cash return formula takes into account financing options in its calculations.
When looking for the right investment property, take a look at what its cash on cash return is by comparing it with other comparable investments.
Cash on cash return is one of the most important metrics to consider when looking for the right investment property.
Bonus: The 1% Rule
As a bonus, we decided to include the 1% Rule in this how-to list. The 1% rule basically just states that a property should rent for 1% or more of its purchase price. For instance, you buy a property for $100,000. If we go by the 1% Rule, you should rent the property out for no less than $1,000 per month.
Keep in mind that this rule-of-thumb only takes a look at a subject property’s upfront cost. It does not take into account any additional costs from home improvements and other expenses. So, in essence, if your $100,000 property needs an additional $50,000 for closing costs and home improvements, then your minimum monthly rent should be $1,500.
Lots of investors use the rule to narrow down their options in a quick and efficient way. If a subject property doesn’t pass the 1% Rule, it’s time to consider other options.
Related: The 10 Best Real Estate Websites for Investors in 2022
Wrapping It Up
In real estate investing, knowing how to find good investment properties is a strength. Not everyone has the knack for finding the best deals around. It takes practice and discipline to get to a certain level of expertise. The great thing about real estate investing is that you can always connect with the right people to point you in the right direction.
What’s more, technology today has allowed investors to search for investment opportunities in a fraction of the time than it used to. What typically took months to do can now be done in minutes with a website like Mashvisor. Searching for investment properties, analyzing data, and computing the numbers is now a lot easier and more accurate than ever.
Get a 15% discount on your annual subscription after you sign up for a 7-day free trial of Mashvisor today.