Second homes and apartment buildings fascinate investors, who turn to Inman’s weekly Real estate portfolio e-mail newsletter as well as the agents who work with this particular category of customers. This month, we’ll delve into everything from the latest from Airbnb and Vrbo to the changes investors are making to their portfolios in a changing real estate market.

The prices are free fallsales volume is down and interest rate are standing. For savvy investors who understand the power of buying when others are selling, we are heading into one of the best opportunities since the Great Recession to acquire investment properties that will give maximum performance.

Savvy investors know that a profitable real estate investment starts with identifying the properties that have the greatest potential for growth. Here are the steps you should take to choose an investment property that can yield the best return possible.

Use the “rule of 72”

In order to identify the right property at the right price, many investors suggest that you follow the “Rule of 72”. Applying this rule allows you to estimate how long it will take for various types of investments to double in value. To apply the rule, simply take the rate of return and divide it by 72.

For example, if you have a stock investment that is earning a 6% rate of return, divide 72 by six. Your stock investment will double in value every 12 years. If your real estate investment has a 10% rate of return, your rate of return will double every 7.2 years. This is a simple way to evaluate returns without using complex mathematical formulas.

Cash is king!

Your cash flow is the amount you keep each month after paying all expenses, including mortgage, taxes, utilities, vacancy, etc. Here are common ways investors use to increase their cash flow and increase the value of their investment.

Buy the property at least 10% below market value

This is the main reason why sophisticated investors are naysayers who sell when prices go up and buy when prices go down. During a seller’s market with limited inventory and a surplus of buyers, properties priced below market value are quickly bid up to market value or higher.

On the other hand, when there is a buyer’s market with a surplus of listings and few buyers, the owners who have to sell often end up accepting offers significantly lower than the current market value. The deeper the downturn, the more opportunity investors have to make a smart buy with substantial upside potential.

Choose the right neighborhoods

Start by identifying the neighborhoods generating the best yields. Be sure to include the easiest and hardest rental price ranges to rent, the neighborhoods with the highest rental demand, and the features that renters in that area are looking for the most. Also pay close attention to the condition of the property. Properties in poor condition can quickly eat away at cash flow.

The authors of HOLD, how to find, buy and rent houses for wealth, recommend the purchase of properties with 2 to 4 units on the edge of good neighborhoods or in transitional neighborhoods where there are essential public services nearby. While single-family residences may have greater rental demand, multi-family units have more tenants and generate better cash flow. In addition, if you buy a property with 2 to 4 units, the financing is identical to that of the purchase of a single-family residence.

Look for properties with below market rents

If you find a property with below-market rents, you can increase your cash flow by raising the rents to market level, as long as you don’t violate rent control laws. However, even in many areas where there is strict rent control, most will allow you to raise rents to market level when the current tenant moves out.

Price Appreciation: An Essential Element for Building Equity

While cash flow may be king, buying during a downturn increases the likelihood that you can take advantage of a significant upside in value as the market moves from a bid market to a following sell market.

Also, pay special attention to areas where there may be a considerable amount of redevelopment, which are located near the arrival of new rail lines or new subdivisions being built. Another option is to look for older properties that have not been renovated but are in an area where people are doing major renovations or demolitions to build new construction.

Also, search for the “direction” of a city. For example, when I first moved to Austin in 1998, there were lots of new developments about 15 minutes south of downtown. I paid $262,000 for my house, which is now valued at over a million dollars.

Today, Austin is “moving” west to areas like Dripping Springs as well as east of the airport, where Elon Musk is building a new SpaceX facility. The surrounding areas are already experiencing rapid growth, which should benefit existing rental properties nearby.

Pay special attention to carrying costs

Nothing can eat away at your cash flow faster than runaway holding costs. Here are some key tips to consider when buying:

Repairs

The most important property features to consider are the condition of expensive repair items, including the roof, plumbing, exterior and interior condition, age of appliances, and heating and air conditioning. Carefully assess the age and expected lifespan of each of these upgrades, so you can develop a budget to handle ongoing maintenance and replacement.

Compare property tax rates

In California, Prop 13 charges 1.2% of the value of the property at the time of purchase for property taxes. Taxes cannot increase faster than two percent a year.

On the other hand, Texas assesses property taxes at their full appraised value (less homestead or other exemptions). For example, tax rates vary widely by location. Property taxes where I currently live are 0.1545 per $100 property assessment. In my previous house they were .2301. This difference translates into property taxes of $7,725 where I live now versus $11,505 where I lived before.

What is the vacancy rate?

The most recent figures show that the national vacancy rate is at 5.6%. Properties with lower vacancy rates have less tenant turnover and, therefore, lower operating costs. If the vacancy rate is high, the question is, what is the cause of the problem? If it’s something you can fix (like upgrading appliances, landscaping, painting, etc.), this property could have good upside potential. If it’s noise, crime, or another major issue you can’t control, look elsewhere.

Manage your tenants and properties like a pro

An important aspect of investing is carefully selecting your tenants. When you rent to a tenant, you establish a long-term relationship. How you interact with the tenant initially sets the tone for your future relationship. If you are handling this yourself, there are a number of excellent screening services.

If you don’t want to handle this process personally, you can list the property with a real estate agent or with a property management company that handles rentals. These companies will select the tenants for you, collect the deposits and finalize the rental agreement.

If you don’t hire anyone to manage your rental property, you must also be prepared to deal with tenant issues such as repairs, non-payment of rent, damage to the unit, etc. For this purpose, you will need the following:

  • A list of trusted vendors to handle maintenance and repairs on the property. If you don’t have a specific list, HomeAdvisor and Angi are great places to look for vendors that have been vetted.
  • A lawyer to handle all legal issues such as evictions, broken leases, illegal tenant activity, etc.
  • A system for collecting rents and accurately monitoring real estate expenses.
  • A CPA or other tax professional to prepare your tax returns and who is also familiar with the 1031 tax deferred exchange provisions and how they would apply if you were to sell your property.
  • If you are not going to manage the sale or purchase of your investment properties, a knowledgeable real estate agent to handle your transactions.

The recent seller’s market is history. The good news is that the emerging buyer’s market, with rising inventory and falling prices, is a golden opportunity for you to invest in real estate to create income now and in the future.

Bernice Ross, President and CEO of BrokerageUP and RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 published articles. Discover its broker/manager training programs designed for women, by women, on BrokerageUp.com and his new training as a sales agent at RealEstateCoach.com/newagent.

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