As prices plummet, some solid investment opportunities are starting to emerge…but how do you identify good investment properties?
Step 1: Identify some target neighborhoods.
- The first thing to do is to consider long term (e.g., 10 years) appreciation potential. Think about area employment (and more importantly where those employers are—commuting time is a big factor). Also think about long term demographic shifts like BRAC, as well as infrastructure projects like new metro stations or light rail lines.
- Consider the neighborhood. Ideally you want to find the lone problem house in a great neighborhood, but that’s easier said than done. Also consider neighborhoods that previously had been more desirable in terms of age, location, and home condition, but perhaps were hit hard by this recent wave of foreclosures.
- Consider the price range – While you hope to ultimately find a property that will be cash flow positive, you nonetheless have to front the money to buy it, and getting a loan these days isn’t easy, especially for investors. Financing remains a problem, and lenders require investors to put 30% down, plus closing costs of about 3%. Interest rates run about a percentage point higher than owner occupied properties. Figure out how much cash you’re willing to put into the property, what you can qualify for in a mortgage, and back into a price range from there.
- Look at rents the neighborhood can command. Once you identify a few target neighborhoods, begin collecting rent data. The best place to collect rent data is on Craigs List in addition to the MLS. This is because many landlords conduct the process themselves and so the listings are never in the MLS. You also can’t be sure how aggressive a listing agent was in procuring a renter, which may skew the price. If they put it into the MLS but then never on Craigs List (by far the more popular site for finding renters), then it’s likely the rents there are lower than what the market actually commands. Unfortunately there’s no easy way to gather historical Craigs List data – you just need to keep watching and see which rentals seem to go quickly. Consider calling some of the landlords to ask whether they’ve had a lot of responses.
Step 2: Identify some target properties
- Short Sales & Foreclosures are a great opportunity because you can be patient. (See my post on the challenges of timing a foreclosure transaction here and the frustrations of shorts sales that never close here.) While an owner occupant doesn’t have the luxury of time and can get frustrated with all the problems of these transactions, investors can go with the flow since their timing is more flexible. And that flexibility pays off by getting properties for less money.
- Consider the home’s condition and your level of expertise in doing or managing renovations. Many of the short sales and foreclosures on the market today come at bargain prices, but require everything from heavy cosmetic work to kitchen and bath remodels to mold remediation. Very few properties in the attractive price ranges are move-in ready, but there's a lot of upside for people not afraid of elbow grease and with the right handyman connections.
- Be patient. You may need to wait for the right house at the right price. Set up an alert so that you can be ready to jump on a property that meets your investment needs as soon as it comes on the market—you can be sure other investors are circling and waiting for the right opportunity as well!
I’ve seen some inside the beltway single family homes below $400K and townhouses in under $300 in areas that I feel have great long term potential given our area's strong job market and expected government growth (see this post on the best place to live in a recession here, and article on the bailout being a boon to our local economy here.)
In another post I’ll cover how to look at cash flows for an investment property.
I’m working with several investors and have already previewed many homes that fit the criteria above. Call or email me to set up an appointment to discuss investing opportunities!