How to Source and Qualify Profitable Investment Properties
Purchasing real estate is a tried and true method of investing capital with incredible ROI potential. Some of the most successful people in our society made their fortunes in the real estate sphere. However, becoming a prosperous RE investor is no walk in the park. Like anything in life, it takes education, experience, and preparation to become a successful real estate investor.
Real estate deals are among the most significant transactions most people will make- so there is little room for error. Luckily, there are many strategies and resources you can take advantage of to avoid many of the pitfalls associated with real estate investments. In this piece, we will examine some of the best approaches you can use to source and qualify profitable investment properties.
How to Source Profitable Real Estate Investment Properties
When it comes to sourcing real estate properties for investment purposes, it is integral that you remember that your journey to profitability begins with purchasing a property- not selling it. This fact is true for investment properties bought as rental/lease properties but is just as crucial for properties obtained with the intent of a relatively quick resale.
Purchase Investment Properties With a Goal In Mind
No matter what your intended use of an investment property, you must have a clearly defined goal before signing on the dotted line. Your strategy should be based on your desired profits relative to your exit strategy, whether that be regular cash flow over an extended period or a quick sale/flip to generate immediate profits.
If you overpay for a property you are starting your investment off in the hole- and profiting off of said investment will be considerably more difficult. Know your optimal purchase price and the expected return on your investment before you make a purchase. While determining the purchase price for a piece of real property is a mix of science and art, it is a skill you must master to be a successful RE investor.
Identify and Utilize Effective Property Selection Criteria
A property selection criteria or “checklist” can help you narrow your goals and focus on the most beneficial avenues for you to succeed. These criteria may involve proximity, housing type, property attributes; or other variables that change the basic nature of a property investment.
For instance, a capital investment in a ranch on the windy plains of Texas will have dramatically different criteria compared to a multifamily property in the heart of San Francisco. Effectively identifying the best criteria for your investment has the potential to improve your process in the short-term, and increase your returns on a longer scale.
Pay Attention to the Percentage Rules Relating to RE Investment Property
There are few hard and fast rules relating to the percentages involved with purchasing real property; but there are some basic percentages that are used by investors to determine the viability of a project or investment. ROI, as well as potential cash flow and income, are all important of course; but it is not always possible to determine these variables before you invest a great deal of time and effort into a deal.
For example, rental statements will show you the current cash flow the property is generating; but understanding this number in relation to property upkeep, taxes, or the valuation of the property is harder. The 70%, 50%, and 2% rules can help you to gain a better understanding of the financial circumstances you need to know before making a purchase.
The 70% Rule of Real Estate Investing
This rule helps you to figure out the top price you should pay for a property ARV, or after repair value. While short-term flippers primarily use the 70% rule; it has value when determining the value of most commercial or residential properties. This rule states that buyers should only pay 70 percent of the post-repair value; with the total costs of repairs deducted from that total.
The 50% and the 2% Rule of Real Estate Investing
This rule is very simple-it states that you should not allow more than 50% of your income to be spent on property investment-related expenses; other than your mortgage or capital costs. When observing potential purchase properties; cut the stated monthly income in half to compare to your principal and interest payments or capital costs.
Once you crunch those numbers you should have a better understanding of your total cash flow after expenses including lease/rental vacancies; maintenance and repair bills, taxes and other costs. The 2% rule is only applicable to rental properties; it states that your realistic rental income from that property should be roughly 2 percent. This is not a hard and fast rule; rather it is a conservative guideline that may not be useful in every situation.
Qualifying Your Investment Property or Portfolio
Gone are the easy credit days of yore. Prior to the 2008-2009 recession, mortgage credit was readily available. Since the crash, things have tightened up considerably- but there are ways to ensure access to the credit you need. Qualifying for an RE loan is not rocket science; the same principles that apply to corporate or personal borrowing hold true for real estate mortgages. Large down payments always help your odds of qualifying.
These payments reduce the risk a borrower takes when lending capital for investment purposes. Borrowers generally assume higher risks are involved when backing an investment property rather than a primary residence; and this shows up in their approval rates. Making a more substantial down payment can help alleviate some of this risk.
Your personal/company credit profile also has a tremendous impact on your ability to qualify for an investment property loan. History of on-time payments, available to exercised credit; and repayment history of current loans are all critical factors in a lending decision.
Qualifying in Less Than Ideal Circumstances
For a multitude of reasons, not everyone can qualify for an investment property loan. Whether the bank or lender considers you overleveraged or sees a red flag in your credit history; it does not mean you should give up. The lending algorithms and checks that large institutions use are impersonal; and are famous for being unable to understand individual financial situations.
Using a smaller lender with a focus on customer service or owner financing may be a better option for those unable to borrow from traditional lenders. Owner financing is one way to avoid conventional credit portals to acquire the capital you need to invest.
The Takeaway
Nobody said making a living in investment properties was easy; but if you take these steps into account you will have a substantial edge over the competition.
Ken is a huge fan of living his life to the fullest. His health is extremely important to him and he currently enjoys helping Generation Homes NW, get the word out about their luxury new home communities. When he’s not working, he enjoys blogging, hiking, and plenty of steak and grilled veggies.
