If you’re thinking about getting into real estate investing, particularly buying homes for rental income, it’s no secret that you’ll want to find the hidden gems before everyone else. Buying in a neighborhood before it gets hot, at a low price, and being able to ride the wave of popularity as the neighborhood grows can be a great investment strategy long term and help you build your real estate empire. But getting in early isn’t always easy. The whims of taste and cool can change overnight and buying in an area that everyone thought might be up and coming may not pan out. There are some things to look for and with a little knowledge, research, and intuition, you may just find yourself sitting on the next hot property.
Real Estate Investing 101
The concept is simple. Buy homes at low prices that bring in rental amounts that exceed your mortgage payments and expense on the home. Your first step is to run the numbers. Need help with that? This post from BiggerPockets makes it so simple, you can calculate all the numbers you’ll need for rental property on a napkin. Like any investment, you want to see what’s coming in and what’s going out – the comparison of the two is where you earn (or lose) money on the deal. Some investments pay off long term, some pay off the day you purchase them. The goal is to be on the positive side as quickly as possible.
An important thing to remember is that these homes you’re buying are investments. As investments, you’ll want to protect them long term. Take care of them and they will take care of you. The biggest mistake we see new investors make is not taking real estate investing as a serious long term endeavor. If the house needs repairs, don’t ignore them. Those problems build up the longer you put them off and they can get much more costly the longer you wait. Regular maintenance of systems in the home will help you avoid costly malfunctions. Treat your properties well and they will treat you well too.
Spotting Hot Markets for Real Estate Investing
The first step is playing the simple numbers game – look for areas with low sales prices and higher rents. Be sure to check rental prices over time – are they rising or are they falling? Are there large amounts of rentals available in the area? How long do the rentals stay on the market? Look at individual properties – do they stay rented or is there a lot of turnover (and beware too much short term turnover, such as every few months)? The more you look at the activity in the neighborhood, the better. Your real estate agent can help show you the comps for the area, both rentals and sales.
Watch out for other investors who were looking to spot trends for real estate investing and may have misjudged the market. Look for homes that were bought and sold within short time periods. Were they improved and flipped or is someone cutting their losses because the area didn’t pan out? There may be bargains there, but buying a property you can’t rent down the road isn’t going to be to your advantage.
Listen. There is always chatter out there about what’s hot and what’s not. Look to where your target renter spends their time and listen to them. They’ll tell you where the trends are going. Social media can be a great tool for this kind of research. Read the business papers and see where developers are putting their money. You don’t want to wait until the last second though, so be ready to move quickly if you think you’ve spotted an uptick in interest. Of course, your intuition comes in handy here too. See something that just seems too good to be true or only one person seems to be gravitating towards? Remember, not all investors get it right and sometimes even the biggest projects fail.
When analyzing the sales data in a given area, look for days on market. Is there a sudden downward trend? When the average days on market starts to fall, it may indicate that investors are starting to snatch up properties because there’s something going on. Be careful however, as it may just signal a normal spike in activity. This is where long term trends can really help you get a better picture. Comparing the long term and short term trends can help you see whether this is normal or there’s actually something going on. Remember, when days on market trend downward, prices tend to move upward. Shorter days on market typically precede price hikes, so be sure and time your entry carefully, you never want to be on the growth side of prices.
Look to the commercial market. Corporations spends millions each year on market research. They don’t randomly choose their next location, so if you see development happening, you can be sure they see value in the area. Learn where the businesses are going in before they start building. Know your target renter’s likes and dislikes as well. Stores like high-end grocers and coffee shops are popular these days, so look for Trader Joe’s, Whole Foods, and mom and pop artisan coffee shops. The more you know about the local commercial trends, the better you can spot activity before everyone else does.
Connect with the city. Attend planning sessions, committee meetings, public hearings – the more you know about what’s happening in your city the better. Pay special attention to any meetings that involve the public being able to speak. Listen to their concerns and thoughts and get the insight on what’s happening in their local communities. Serve their needs and give them what they want and you’ll find yourself in a much stronger position. Listening is probably the investor’s greatest skill – the people will tell you what they want and need.
Finally, your mom was right when she taught you not to put all of your eggs in one basket. While you may want to purchase more than one property in a trending neighborhood, real estate investing is a long term strategy and trends do come and go. While downtown areas are experiencing a surge all over the country, there was a period where they were abandoned for the suburbs and suffered greatly for it. Spread your investments around so that you have a cushion of safety in case one area doesn’t pan out or finds itself suddenly on the “not hot” list. Like the stock market, some good planning will help you weather any storms that may come in the local areas housing market.
image courtesy of 401(K) 2013
I want to make sure that I invest in real estate right. I just don’t know when to strike! It makes sense that I would want to keep an eye out for a good market. I’ll keep that in mind!
Buying value reduces your risk considerably. Investors who buy in hot markets hoping for appreciation normally don’t do very well. It’s important to know what part of the cycle the market you’re considering is in. Thanks for your useful post.