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Advanced Investing

Your Ultimate Guide to Finding the Perfect Real Estate Investment Property

March 19, 2019

Investing in real estate is a great way to increase personal wealth. That’s why a majority of America’s wealthiest individuals have a substantial amount of their portfolio in real estate.

Many investors turn to single-family housing to start making money right away. However, this short-term strategy may not play out as well in the long run compared to other opportunities.

The more seasoned investor will turn to value-add multifamily real estate investing. It provides consistent rental income, increased opportunities, and a less demanding property management regimen. All of these factors result in significant profits when the property is resold.

After deciding that investing in multifamily real estate is right for you, finding the perfect property that will allow you to reach your financial goals is the next hurdle.

Do Your Homework

First, run the numbers. Finding an ideal multifamily housing unit will take much more attention and time than a single-family residence. Usually, there aren’t market comparisons readily available to determine the exact value of a multifamily housing unit.

Evaluate things like purchase price compared to long-term costs and expected rental income. If major repairs are needed, they may be significantly more costly than other types of properties.

As the investment’s goal is to provide a positive return, the numbers are the most important consideration. The only way to gauge success in the investment is the bottom line.

Checklist items:

  •   Obtain market comps (if available)
  •   Look at the purchase price and determine how the seller arrived at the number
  •   Evaluate long-term costs
  •   Estimate renovation costs

Location is key

In order to maximize the return on your investment, you need to have units that are desirable. One of the most important criteria for tenants, especially ones that are willing to pay high rents, is location. They want to live in a desirable area, with plenty of amenities, and well-maintained neighborhoods.

Checklist items:

  •   Proximity to schools and school rankings
  •   Demographics
  •   Unemployment numbers
  •   Job growth
  •   Income levels
  •   Crime levels

You can easily obtain this information online. One such site is https://www.neighborhoodscout.com/. They do charge a fee, but there are other free resources online as well.

Investors need to look at the demand for a certain area as well as the current yields and expected growth when considering their purchase.

Don’t Get Over Your Head

When referring to multifamily real estate, it’s easy to imagine large, expensive apartment complexes. For investors just starting out, the risk may be too high for such a significant investment. You have options. You can begin by purchasing a duplex, triplex, or fourplex. The risk is a little lower and they are considerably more affordable. Or, you can invest with expert partners, leveraging their experience and expertise for a maximum return.

Financing costs will also come into play. Keep in mind, a down payment of 20% is usually required from lenders for investment properties. Interest rates on the loan are also determined by your credit score.

Checklist items:

  •   Evaluate options (duplex, triplex, fourplex, REITs)
  •   Examine credit score
  •   Get pre-approved
  •   Secure down payment

Evaluate Rent Prices

Whether you will rent out your units as-is or you plan on a value-add strategy, the potential income per unit is an important factor. There are useful sites that can give you an estimate on what average monthly rents are, Zillow is one. You should do a little more research on your own and consider all factors. The potential income from a property is the reason you are investing. Therefore, if significant income is not there once you make improvements, it probably isn’t a good investment.

Checklist items:

  •   Determine current rents
  •   Estimate potential rents after value is added

Who is Selling?

The person selling the multifamily property plays a huge role in how seamless a transaction will be. Purchasing housing units from an individual is very different than purchasing from a bank. Purchasing from a for-sale-by-owner is much different than purchasing from someone using a real estate agent/broker.

Motivation is the key sticking point. The more motivated the seller, the more potential exists for significant savings. In other words, know who you are buying from before making an offer and beginning the negotiation process.

Checklist items:

  •   Determine who is selling (bank, broker, FSBO)
  •   Find out how long the property has been on the market
  •   Evaluate how emotionally attached the current owners are

Consider Investing in REITS

Investing in multifamily real estate can be intimidating. Real estate investment trusts (REITs) are a great way to diversify a portfolio while limiting your risk. As a result, you will have someone else doing the work, weighing all factors, analyzing the data, and making an expert decision regarding the investment.

REITs allow for great returns without the headache and learning curve. Non-accredited individuals can join and own a diversified real estate portfolio with a single investment.  

By investing in a REIT, you will:

  •   Be eligible for special tax advantages for income derived from dividends
  •   Have a diversified portfolio, protecting you from stock market volatility
  •   Have a professionally managed investment
  •   Benefit from the Trump-tax cuts (a possible 20% deduction)
  •   Have success in reaching long term financial goals

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