Monthly Archives: March 2012

Choosing the Right Type of Investment Property

The properties that make the best rentals generally fall just below the typical median priced home. There are several reasons for this. For starters, this is a home in which the typical renter can afford. By simply being available to a bigger group of people, this will keep vacancy loss costs lower. In addition, most renters will be able to afford their payments and remain in the home longer.

The bigger the home, the more attractive it is to another buyer rather than a renter. Despite having better resale value, more expensive homes don’t necessarily make a good income property. Since most people who live in these home prefer being home owners, they are less likely to renew their lease.

Another big problem with more expensive homes is that there are more costs involved. They tend to be larger and contain more fixtures. They tend to consist of more repairs and maintenance. This is especially the case each time a tenant moves out. If you get an irresponsible tenant, they can do considerable damage. It’s not unheard of to have to pump thousands of dollars into the property after evicting a bad tenant.

It can often be a challenge to balance rental value with resale value. Cheaper homes do not appreciate as much and don’t sell as fast. This is partly because it appeals more to other investors than other home owners. Obviously, another investor is likely to be bargain hunting. Many investors will pass until they find the perfect deal. Since they will not be living in the property themselves, an investor will treat a property as a commodity.

Condos and townhouses are at the opposite end of the spectrum from expensive homes. They typically offer good cash flow. However, being able to sell a property in a weak market is very difficult. Banks and lenders don’t want to finance them. Also, the price is so low that the fixed costs of financing (if you can get it) are so high in relation to the property that is generally isn’t worth it. For an investor who has cash and is just looking for cash flow, condos can be a great investment. Despite the obvious drawbacks, they have far less costs regarding repairs and maintenance between tenants.

That being said, the type of property you choose to invest in matters greatly. Most investors should seek a balance by choosing properties that are good quality that still make good rentals. This is where you stand to make money on rental income as well as long term price appreciation.

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Narrowing Your Focus to Find the Right Location

When you narrow your focus, you are better equipped on finding yourself the best possible deal. When buying a home, you can use this strategy by focusing on a specific neighborhood.

If you’re new to a city, it’s wise to take some time to know what area you want to live in. Once you’ve done this, you can narrow your focus to a specific area. This has several benefits. First, you become an expert quickly. You become more aware of trends that affect the area. You also have a good understanding of what type of home you like. You also know approximately how much each house is worth. When you establish a degree of familiarity, you are better able to make an informed decision.

A home in a good location will always be worth more than a home in a mediocre area. This isn’t solely dependent on the neighborhood. It also depends on the street and the property that surrounds it. Generally, you should trust your intuition when selecting a location. If a property is available for an attractive price, but it doesn’t feel right, you should pass on it. Even if it’s available for a great price, it’s probably not something you would be happy with. This is why narrowing your criteria is critical. It can save you from making a mistake and settling for less than what you originally wanted.

As mentioned earlier, specific streets and lots do matter. Very few people like being on a busy street. In addition, it’s preferable to have trees and good landscaping. This is especially important in a desert environment.

Zoning is another important element of finding the right location. It can make a huge difference in the future of that location and neighborhood. School zoning is another factor that can add or subtract value from a location. Be sure to do your homework by researching the reputation of the schools your neighborhood is zoned for. These are all factors that matter and will make an enormous difference in the long run. If you have strict criteria and never bend on your requirements, you will find a home that you’ll be happy with.

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Why Real Estate is a Good Investment Choice

Real estate allows an investor to control a valuable asset with only a small commitment. For investment purposes, an initial investment consists of a 20% down payment plus some closing costs. If you are buying a fixer, then your investment will be higher. That said, your initial investment is much smaller in relation to the value of the asset you are purchasing. Few investments allow this kind of leverage.

Indeed, leverage can be a double edged sword. It can magnify your investment results when things go well. It can work in reverse as well. That is why a margin of safety is vital. A margin of safety is a principle typically associated with investing in securities. It can also be applied to real estate.

Margins of safety for real estate can include the spread between your income and expenses. This is where you only settle for properties offering good, consistent cash flows. For example, a residential property in a distressed market is likely to be underpriced. Your mortgage payments are low in relation to what you’re getting for rent. Being a residential property, there are also plenty of people to rent the property to. Compare this with a commercial property with a greater return on investment but is attractive for only certain types of businesses. You have a much higher risk of vacancy loss. This simply means the property is sitting empty while you are paying the mortgage, taxes, and upkeep. This is why the residential property is the better investment choice despite having a lower ROI.

Another metric that is useful is the market’s price to medium income ratio. This is an important metric to avoid getting caught up in manias and bubbles. When the price for a median home is much more that three times the median income, the overall market is overpriced. As Warren Buffet has said, there are times in which it’s best to do nothing. Opportunities will eventually come.

In addition to getting positive cash flow, real estate is a good inflation hedge over long periods of time. There will be bubbles and panics again in the future. However, real estate will always revert back to its intrinsic value. Investors are best off when they don’t get caught up in the highs and lows. Instead, only buy properties that offer positive cash flow while you wait for price appreciation to accumulate.

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