You likely already know that when it comes to investing in real estate it is all about “location, location, location.” However, more experienced real estate investors will tell you that it is so much more than that. Check out these 3 things that all real estate investors should know in order to succeed.
Supply and Demand
Most real estate investors know the terms “buyers’ market” and “sellers’ market”, but if you haven’t heard of them yet, allow us to explain. A buyer’s market occurs when demand is low, and supply is high, thus giving the buyer more power in determining the price they’d be willing to purchase the product (in this case real estate). A Seller’s market is the opposite when demand is high, and supply is low, giving the seller more power to determine the value of the property.
What this comes down to is knowing what the supply and demand are in the market you want to invest in. Say you are looking at two potential investment properties, one in Scottsdale and another in Mesa. You’ll want to see what the month’s supply of properties looks like (5.2 months supply for Scottsdale while Mesa has 2.4 as of 10/25/2018) and determine the demand by looking at sales per month (358 sales for Scottsdale and 543 sales for Mesa as of 10/25/2018). Just from this data, you should be able to gather that Scottsdale’s market, while balanced, is beginning to favor the buyer over the seller when it comes to determining the value of a home, while Mesa’s market has high demand (more properties sold) and low supply (fewer months of supply).
So, why is this information important to know as a real estate investor? For one, it will help you determine the best strategy for a property. Take the example above and with that information you may decide that purchasing the Scottsdale property would be better as a rental property, while the Mesa property would make for a great fix and flip because the demand for homes is still high.
The next reason why it is important to know about supply and demand is that it can help you determine which markets you want to work within. Arizona is full of diverse markets, and the valley is home to many of those markets. Having insight into this will not only help you make the most out of your investment but can also help make it safe as well.
Keep an Eye on Comps
You’ve found the next property you want to invest in and are preparing to make an offer, but before you do you should look at the surrounding neighborhood. Has anything like your potential purchase been bought in the last 6 months so and for how much? What about anything that looks like the potential property once it is fixed up? We like calling these “comps” or comparable properties, and they can help you with a few things when it comes to real estate investing.
Before you buy, looking at comps in the neighborhood or a few mile radius from the subject property can help you determine what the fair market value is for the property, and will help you formulate an offer (or in the case of a trustee sale can help you decide what your maximum bid you are willing to go to.) This will also help ensure that you aren’t overpaying for the property and are getting it for a fair value or even at a discount.
Say you’ve bought and fixed up the property and it is time to list it, you can look at comps once again to decide what your asking price should start at. This will help you decide if you want to sell it as fast as you can at a competitive price, or see if you can receive more by pricing it higher.
Some ways you can go about finding comparable properties is by using the MLS and searching the neighborhood of your home and looking at not just the listed for sale properties, but also the pending and the recently sold (6-12 months is our suggestion to search) properties. You can also do this on other listing sites such as Zillow, Trulia, or other listing sites. While looking at comps some of the most important things to keep in mind are the livable square feet of the property, the price of the property, how the interior looks, and the price per square foot.
Double Check Your Numbers
You’ve opened escrow on the property, you’ve got the budget, and are currently working on getting financing in place (maybe you are working with us to secure a private money loan), but have you checked all the numbers?
What we mean by that is if you have ensured that you are not paying over fair market value for the property, or that your budget also includes some room for bad luck to fall (historic homes may need an update to the framing, and it wouldn’t be the first time budget items would need to be reallocated), and that you can afford your monthly payments for the loan you are getting. Double checking yourself is a great way to make sure you are good to go before you even close on the home.
Doing the math twice not only saves you from overspending (and future headaches if you have to spend more than you had budgeted), but it is incredibly important to do regardless of what it saves you from. This is doubly important if you are planning to do a major remodel or add square feet to the property as the price for lumber and metals used in construction fluctuates due to tariffs.
If you do find yourself in need of more cash because of running into a situation like mentioned above talk to your lender about increasing the loan amount or refinancing it into a larger loan. From our standpoint, we want to see you succeed in completing and selling a home.
Now that you know more about being a real estate investor, how do you plan to put these into practice with your next flip or rental property? If you have a property in need of financing now, give us a call and get financed in 24 hours.