In the previous part of this series, we did a deep dive into the strategy that drives becoming a successful real estate investor. Now it’s time to lay out the details for what kind of properties to invest in…
A Word to the Wise
As we get going, I want to share something Warren Buffet said back in 2012 during an interview. Someone asked him if people should invest in the stock market… or real estate. Here’s what he said:
“If I had a way to buy a couple hundred thousand single family homes… I’d load up on them.” (Warren Buffett, 2012)
He continued: “It’s about as attractive an investment as you can make.”
Enough said ‒ except to point out that he did exactly that. Through a hedge fund, he’s built a massive portfolio of single family homes (SFHs) as an investment. (And he’s used the same strategy we’ve been learning about in this series.)
So, when investigating SFHs for investment purposes, what do you look for?
First, make sure the area (city, county, or region in general) where the real estate is located has positive economic factors.
It doesn’t matter how attractive the property itself is or how good the cash flow looks today… if the area’s economy is flat or declining, your investment simply won’t work over time.
But don’t worry ‒ this isn’t rocket science. Here’s pretty much what you’re looking for:
Job growth ‒ This includes multiple industries and types of employment. If the whole economy depends on one factory, don’t invest there ‒ too much is riding on that one business.
Commercial development ‒ It’s a good sign when restaurants, shopping centers, and business parks, etc., are going up.
Population growth ‒ Look for long-term trends. You want an area where people have already begun relocating to, where the population has already begun to rise.
We’re just going to list these out, with a little explanation thrown in here and there:
Positive Cash Flow
Affordability ‒ Look for areas with houses that are newer and in good condition, where the rental rates are higher than the mortgage payments (don’t buy the most expensive properties, because they’ll lose value too quickly).
Reliable property management available
Near good schools and universities
Located near amenities like shopping and restaurants ‒ People aren’t looking just for a house to live in… they’re looking to maintain a certain lifestyle.
Low crime rate
High overall quality of living ‒ Put yourself in the shoes of the kind of tenants you want ‒ would they want to live in this area?
Access to health care
Timing ‒ OK, this is a bit trickier… Timing is every bit as important as location ‒ it does no good to buy in the exact right location at the exact wrong time. This can happen, so it’s a good idea to an experienced guide to help out in this regard.
Investor concentration ‒ Don’t buy in a rental community. You want to buy in predominantly owner-occupied areas, where the values are higher.
Let’s zoom in even closer…
Single family homes, multi-family units (like duplexes and 4-plexes), and townhomes ‒ remember what Warren Buffett said: “If I had a way to buy a couple hundred thousand single family homes…”
New construction ‒ Maximum of 10 years old (possibly a bit older in some markets). This cuts down on maintenance costs… and attracts better tenants.
Minimum 3 bedroom/2 bath with attached garage
1,200 Sq ft. minimum
Ready to rent ‒ Properties should already feature landscaping, appliances, blinds, garage door openers. You want to make it super easy for tenants to say Yes…
A Look at the Numbers
Here’s a breakdown of the numbers for a property like this. I think you’ll agree it’s pretty impressive…
This is for a newly constructed property worth $158,000 at time of purchase. The owner made a 25% down payment of $39,500. And the property is generating a monthly cash flow of $417.
As you can see, after the first year, when you add the $5,400 cash flow to the property’s additional worth of $7,900 due to appreciation, you get a $12,904 return on the initial investment of $39,500.
I’ve said it before ‒ that is an absolutely amazing ROI.
I guess you could say that Mr. Buffett knows what he’s talking about…
When you buy the right kinds of properties ‒ which includes the area’s economic factors, positive neighborhood characteristics, the correct physical requirements of the properties, and the necessary cash flow numbers ‒ you’ve effectively bought a small business. One that’s profitable and long-lasting by design.
In the final part of this series, we’ll go over a few more ins and outs of why and how these properties are such great investments, and look at some more examples.
For now, though, you’re well on your way to becoming a real estate investment player…
Give us a call at (801) 990-5109 or schedule your free appointment here to begin your personalized Wealth Plan. We’re happy to help you clarify and reach your financial goals by investing in real estate.