I often hear the following scenario when novice investors get into the market. “I found a house for a great price online in small town USA, so excited. I’m going to buy it and turn it into a rental. Then wait for the market to come back and CASH IN.” Good idea Mr. /Ms. Novice Investor, but do you understand the market in small town USA? Do you know how to be a landlord? Have you visited Small Town USA? Do you have a team in Small Town USA?
Here are a few tips you need to know if you are going to expand your real estate investing. ALWAYS do your due diligence. As a practice in my life I don’t use the words ALWAYS and NEVER very often, so when I use one of them I mean it. Doing your due diligence would consist of things like:
- Understanding the local market, where prices are and what the demand is in that market. If you’re planning on using the unit as a rental, what are rents in the area and what are the local vacancy factors.
- What’s your plan for the property? We call that exit strategy. Will you sell the property on the retail market, rent it out or tear it down and build? What is the property’s best and highest use that is within your plan.
- Having a written plan – this is so important that we do it in class. Your plan would consist of things like your entry and exit strategy, your holding period, your total cost and, also something I think a lot of people miss, a PLAN B.
- Knowing all the costs involved in purchasing the property: acquisition cost, fix up cost, holding cost, management cost, taxes and so on. I have wonderful spreadsheets that help me know what to look for and how to calculate these costs.
If you’re buying out of your local market, some of the quick, easy things you can do BEFORE you visit that market (because you should NEVER buy sight unseen) are:
- Check out the demographics for the area. There are several great websites including the U.S. Census site that can tell you things like crime rates, homeownership rates and education and income levels.
- Find out what the local government plans are for the area. Most cities have their city council meeting either videoed or the minutes of the meeting available.
- Hire “feet on the street,” your Out of Area Team. You’ll need to have a broker and or property manager at least.
Here are some quick things you can look for when you do visit:
- When looking at the neighborhood you’re considering buying in, look at the cars. The more late-model vehicles you see in a neighborhood, the more likely it’s an upwardly mobile neighborhood. This indicates a local healthy job market which helps protect property values.
- Does the area have an appealing town center with nice places to eat and good shopping?
- I, personally, like neighborhoods that have older well-cared-for homes with character. They also have stability. Ask questions such as, “Where are we seeing the vast majority of foreclosures or new developments in the area.”
- If you see a lot of “For Sale” signs it could be a sign that the neighborhood is in a downward momentum.
If you’re investing in real estate make sure you’re well educated and do your due diligence.
New investors think it’s easy. They buy on emotion rather than buying with a disciplined plan.