New investors often ask questions such as: “What should I pay attention to when appraising a rental property?”
They’re starting from the wrong place. Like any big venture, real estate investing starts with clarifying your goals. And every investment decision you make must be aligned with your goals.
The goal for most investors is to economic freedom. However, financial freedom is more than just replacing your existing income. It means maintaining your current lifestyle as long as you live.To achieve this you need the following passive income Meet the following three requirements:
- Rent needs to exceed inflation. If your rent does not exceed inflation, you will not be able to achieve financial freedom because inflation will continually erode your purchasing power. The main driver of rents and prices is population growth.
- Income sustainability: Financial freedom requires a lifetime of income. Your financial future is tied to the long-term economic growth of the cities in which you invest.
- Income reliability: Even if the economy is bad, rental income must continue. Income reliability depends on the ability of tenants to maintain employment, even during economic downturns.
process
Choosing a property is a three-step process, starting with the investment location or city, as shown here.
1. Location/City
The first and most important investment decision is which city to invest in. The City determines all long-term aspects of rental income, including those listed in the diagram.
Main selection criteria:
- Significant and sustained population growth
- Metropolitan population exceeds 1 million people
- low operating costs
2. Tenant segment
Your property must be continuously occupied to provide a steady income. trusted tenant. A reliable tenant is someone who stays with you for a long time, always pays rent on time, and takes good care of the property. Trusted tenants are the exception, not the norm.
Additionally, if you plan to hold your property for many years, you will need multiple reliable tenants. The best way to accomplish this is to choose tenant segments that have a high concentration of reliable talent. This segment can be found through property manager interviews. Once you’ve identified a segment with a high concentration of trusted people, determine what and where they’re currently renting.
Based on these properties, you can create what are called property profiles. A property profile has at least four elements.
- position: Where a significant percentage of the target segment currently rents.
- Property type: Type of property currently rented. It doesn’t matter what type of property you’re looking for, including condominiums, high-rise buildings, housing complexes, and single-family homes. Only reliable tenants matter.
- Rent range: the segment’s willingness and ability to pay;
- composition: 2 bedrooms, 3 car garage, large backyard, one story or two stories?
Property selection
If you tell a real estate agent your property profile, they will help you find a property that meets your criteria. However, property selection involves more than just matching the housing requirements of your target tenant segment. The property must also:
- Please fill in the initials ROI and Cash flow requirements.
- The price must be within your budget.
- Rental time must be short.
- The cost and risk of refurbishment must be acceptable.
- This property is low maintenance.
A good property manager can provide you with an accurate rent estimate and rental period for the property, and an investment real estate agent can provide the rest of the information you need.
Choosing (and putting on the market for) a great investment property involves more than just that. However, these standards will help you understand the basics.
final thoughts
We have outlined the process of achieving financial freedom through real estate investing. If you follow this process, your chances of achieving financial freedom are very high. If you have any questions, feel free to ask us in the comments section below.
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Note by BiggerPockets: These are the opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.