If your stomach isn’t in knots when closing on an investment property, you’re probably not making the best decision. You shouldn’t think the home’s curb appeal is irresistible, its countertops are gorgeous, and its amenities are impeccable.
In fact, you should probably think everything is ugly and tacky.
View the house similar to how an artist looks at a blank canvas: full of potential. A good investment is one that’s forward-thinking. It should make little to no sense today — but be genius tomorrow.
Redefining “Perfect” Real Estate
Investor or not, everyone has a different idea of what a “perfect” home looks like. Corner lots, white picket fences, brand-new roofs, and modern appliances are all factors that tend to shoot to the top of shoppers’ lists when searching for a smart buy.
But these elements aren’t what make a savvy investment. Sure, the house will appreciate over the years, and you will likely sell it for more than you paid for it, but the best investors don’t look for the perfect locations, amenities, and overall quality — they look for the perfect opportunities.
Buying your dream home and investing in one are two completely different tasks. Here are four fundamental factors that will help you find the best investment opportunities.
Real Estate Economic Trends
Let’s break this down into two categories: micro and macro.
An example of a micro trend could be something like localized job loss or layoffs. It might sound grim to capitalize on other people’s misfortune, but in reality, great investments happen in areas experiencing temporary tumult.
It’s always darkest before the dawn, and you need to be willing to swoop in before the sun comes up again.
For example, the oil industry recently laid off thousands of people in the greater Houston area, making surrounding suburbs like The Woodlands a prime investment opportunity.
As you read this, you can be sure savvy investors are licking their chops, knowing that Houston is a huge city that still has plenty of jobs — and the oil industry will surely bounce back again.
Macroeconomic trends are much broader, impacting national (or even international) real estate markets. Interest rates stand front and center here.
For instance, getting a sub-4 percent interest rate is something that alone could give you the green light to take a risk on a property. Smart investors know that it’s okay to slightly overpay for a home when financing is so favorable.
Replacement Value of Real Estate
When Realtors spout off the cliché, “location, location, location,” average buyers think about things like how close the home is to a hospital and how long their work commute will be.
Smart investors, on the other hand, think about how much the land is worth and the home’s replacement value.
If a house is listed at $100,000 and the empty lot next to it costs about the same, this is a strong indication that the house’s replacement value far exceeds its price tag — meaning you’ve found a great investment property.
Cap Rate of Real Estate
Life has a tendency to throw unexpected curve balls our way, and it’s nice to know we’re prepared for them if and when they happen. So, even if you don’t plan on renting out your investment property, you want to be sure you’ll see a favorable return if the scenario arises.
This is where looking at a property’s cap rate — its yearly income potential divided by its current market value — is crucial. If you find a home with a higher cap rate than similar properties in the area, you’ve found an undervalued property worth investing in.
Simply put, the best investment is often the least desirable house on the block. It’s the one with the paint job that’s peeling like a nasty sunburn, the grass that grows wildly, the missing shingles, and the boarded-up windows.
Almost every nice street has at least one house that sticks out like a sore thumb for all the wrong reasons and costs half as much as the rest.
Buy the $250,000 house in the $500,000 neighborhood, and bring it up to its potential. Find the diamond in the rough, and reap the benefits of your foresight.
Savvy real estate investing is all about taking bold risks that average homebuyers are afraid to take. Think of the last place you’d want to buy a home right now–it’s probably a good investment opportunity.
Economic turmoil in Greece has got your imagination running? Job layoffs in New Mexico? Civil unrest in St. Louis? Where there’s a war, economic collapse, or job layoffs, there’s opportunity.
It can be difficult to see beyond these bleak circumstances, but that’s what makes real estate investing the ultimate exercise in optimism. You have to be the one person with enough faith in the area to know it will bounce back.
You have to put 100 lowball offers out and not care when people yell at you because they have families to feed.
All you have to do is wait. You’re bound to get a call from the very people who turned down your offers, saying, “Remember how offended I was three months ago? Would you be willing to reconsider?”
Be brave, be persistent, be patient, and follow the fundamentals. Opportunity awaits.