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If you’re looking to diversify your portfolio, real estate can be a great option. Historically, real estate has had little to no correlation with stocks and bonds, making it an excellent choice for diversification. For the first-time investor, purchasing real estate can be a daunting task.
Real estate can be very unforgiving. It’s essential to do your due diligence and have all your bases covered. In this article, we will be going over some of the critical components you should consider before buying real estate.
- Location is king.
- Inspect the neighborhood and make an educated guess on the vacancy rate.
- Get a good sense of the value of the potential property you are looking to purchase by running a CMA on the neighborhood.
- Consider bringing 20% down or more to increase your cash flow.
Looking for the right property
You have two main options you can take when it comes to looking for potential rental properties. You can either start yourself by going to public portals like Zillow and Realtor.com or hiring an experienced real estate agent. If this is your first time, we recommend you hire an agent but be aware there are tons of agents out there that would do anything to sell you a dump to get a quick buck.
Make sure you ask questions, be proactive in your relationship. An agent’s job is to help guide others on their purchase. If an agent cares, they will be more than happy to answer any questions you may have.
If you’re looking to be active in managing your rentals, you can do so, especially when you only have one or two, but as you add more, maintaining them will pose quite the challenge. If you ever find yourself in that situation, consider hiring a property management company. They handle the day-to-day operations of a rental.
Features to consider
The location of the property will determine the type of tenants you will attract. If the house is located in a sketchy part of town, chances are your maintenance cost will be higher.
Always take into consideration the schools that are available near the rental. A good school will typically drive in higher-quality tenants. If the home is near a college or university, the demand for the home will normally be greater since college kids are looking for places to rent.
If the home is near a good school, the property will either retain its value or increase as time goes on.
Tour the neighborhood and see what kind of amenities it has to offer. Gyms, malls, shops, and restaurants tend to attract renters and add value to the property.
No one wants to live in a crime-infested neighborhood. The value of the home tends to go down as well.
Neighborhood Vacancy Rate:
See the number of listings and ‘for rent’ properties in the area. If there is a lot, it can be for two reasons. 1. seasonality or 2. bad neighborhood. If high, consult with your real estate agent to determine the possible reasons for the high vacancy rate in the area.
Keep an eye on developing neighborhoods (areas under construction). If done correctly (like adding amenities), it can skyrocket the value of the homes around it.
Which type of real estate to start with
When investing in real estate, you have many options. You have single-family (typical residential home), multi-family (duplex, triplex, apartments, ETC.), commercial, condos, land, and so forth.
We recommend you start with either single-family or multi-family homes. These investments are more accessible to the general public, giving you a good taste of what it’s like to invest in real estate. We don’t recommend you investing in condos. The HOA fees associated with them will eat into your monthly cash flow.
We hope you received a better understanding of the critical components you should look into before diving into the world of real estate. As always, if you have any questions, you can always reach out to us. We are a locally based property management company in Oklahoma City. We deal with real estate investment all the time and are always willing to share the knowledge with our audience.