Recognize a Good Investment
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Many people get excited at the idea of investing in real estate. However, it would be foolish to think that you couldn’t make a bad investment when it comes to buying property. That would be a myth. Therefore, you need to learn how to recognize a good investment.
You will learn to recognize a good investment when you start researching the areas where you want to buy. Areas with many empty lots, rundown buildings, and other signs of recession should be avoided. Areas where there is new construction and signs of growth should be carefully considered.
To recognize a good investment you must first know your market (read our pervious article). This is done by researching the sales in the area. You may find a property for sale with an asking price of $100,000. And on the surface it may seem like a good investment. But if similar properties in the area are selling for $90,000 that likely means the property in question is not a good investment. If you find similar properties selling for $130,000 then the property may still not be so good. You need to consider how long it took the other properties to sell. When the market is moving slowly, meaning properties are taking six months to a year to sell then the properties in the area would not be worth the effort. You should find another area.
Once you find a potential investment property, the real investigating begins. If you are buying new construction (or pre-construction), then you can easily compare the purchase price to the recently sold “comps” in the area, as well as a recent appraisal from the builder.
If you are buying “used”, you will want to determine if there have been any upgrades or major structural changes to the property. The best way to do this is to check the permit office for any permits that have been pulled for the property. This will give you a better idea of what the property owner feels the home is worth. The reason you want to know this is because when you make an offer, you will want to know if the seller is going to stick to what they are asking.
Have a contractor inspect the property to determine if there are any major repairs which may need to be done. You do not want to buy something that will end up being a “money pit”.
You will also want to know if there are any plans to change the zoning in the area. This can make a big difference on whether the property is a good investment. If there is growth in the area, you may find the zoning is due to be changed from multi-family to commercial. This could make the property go up in value. The opposite is true with other zoning changes.
The KEY to recognizing a good real estate investment is to make sure the property is being sold under market value, in an area experiencing growing, and making sure the zoning is in accordance with what you are buying.
To further ensure you have a good investment, make sure the property will provide you with a positive cash-flow if your strategy is to hold the property. Conversely, if your exit strategy is to “flip” the property then make sure you have enough equity to leave you with an annualized return of 15% or more after deducting all your expenses (repairs, holding costs, and any selling fees).
As you do more deals, you will learn to better recognize a good investment from a bad one. A good one will make you money. A bad one can cost you a fortune.
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