Selecting the Right Property for Investing
About The Author
by: Gary Fee
Basic Economics
We all know that the market is the intersection of Supply and Demand. The set price of goods or services is wherever consumer demand meets producer supply. In real estate, demand always sets price. However, real estate is more complex than just that, and you need to research why market indicators in your area are the way they are in order to make a wise investment. Why is there a high or low demand, what is driving the prices up or down, what are people looking for, are people making more money now? Of course, you are going to be looking for markets with a strong demand and low supply for investing techniques like flipping and wholesaling. However, even markets with a below average demand and above average supply of real estate can yield decent profits through investment techniques such as listing with a lease option and buying a home for rental.
Making money requires that you know when the market will go bad, or begin to boom. Waiting until after the market changes before making your move is a good way to do poorly. You will want to know when the market in your area is at its highest so that you can sell off and take your profits, and at the low end, ready to head up again, so you can get in on the best deals for future profit. You can leave this to chance, or you can pay attention to the market indicators and let them show you where it is going before it moves.
Market Indicators
Some indicators are more important than are others, but all should be considered before making an investment. When doing your research remember that your local numbers and statistics will not necessarily reflect those of the national market. Real estate values are always local in nature.
-Housing Affordability-
The National Association of Realtors (NAR) has an index that gauges median income against median price. A rating of 100% means that the median earner has just enough income to purchase a median priced home, assuming a 20% down payment. An index number above 100% means that the median earner has more than enough money to qualify for a loan on the same homes with the same money down. A rating of 100% is ideal for a growing market and a higher supply.
-Population Growth-
In general, a growing population means increased demand for real estate. For instance, if the average growth over the past five years in your town has been 3%, but a new highway and industrial park drive more people to the area then the population growth rate will probably increase. Supposing that the local chamber and county planning commission expect the growth rate to approach 10% in the near future, you will want to invest in this market.
-Employment-
Employment is a good indicator for an obvious reason. If chronic unemployment is high because of problems with local industry, like in Michigan, then this may not be the best time to invest in working class housing serving the needs of the auto industry because there simply is no money to buy real estate, and because people are leaving the area to seek employment elsewhere. On the other hand, investors who saw the increase in major corporations moving their operations to North Carolina made a huge profit. These companies brought a large influx of upper-middle class wage earners seeking housing and employment. The market there is still booming. Noticing the up or down shift in employment figures can help you predict the market ahead of its shift. The best indicators are low unemployment and a growing local industry.
-Consumer Confidence-
A market with high consumer confidence should do well. Low consumer confidence can depress a market through reticence to buy because consumers are unsure of their future earning potential. As expected, this hedges prices down. The NAR also measures consumer confidence. A score over 100 means that consumers have confidence in the economy, while a score under 100 means that consumers have less confidence, and the real estate market will reflect that. High consumer confidence often comes with low unemployment rates and a strong economy.
-House Sales-
The sale of homes is a direct indicator of how well the market is doing. High inventories, with homes sitting for more than 120 days will hedge prices down into a buyers market. If inventories and average time on the market are low then prices will be higher, and the time will be ripe for quick deals and investment techniques like rehabbing and wholesaling. You should be aware that sellers using multiple agents listing separately, and agents delisting and relisting properties could manipulate the putative Days on Market (DOM).
Home sales are really a following indicator. It is usually the result of higher consumer confidence, employment, and affordability.
-Interest Rates-
Lower rates often result in higher prices and more qualified buyers. Do not overestimate the importance of this indicator, though, for when consumer confidence is high, higher rates will have less of an impact on the market. Be on the lookout for cash-following properties when rates are low. Sometimes a percentage point can be the difference between a positive cash flow and a negative one.
Best Investment Properties
To put the odds in your favor, look for standard investment properties. Avoid the quaint and the kooky, and never buy an investment property just because you would want to live there. For the fastest turn-around, you want properties that will appeal to the greatest number of people. The point of investing in real estate is to get your investment back with a healthy profit. To that end, I recommend the following qualifications to ensure a quick flip.
* Priced right for you
* Needs a little work
* 5 to 50 years old
* Single-family dwelling
* Three bedrooms with two baths
* Decent area
* Priced from the lower median to median for your area
The price should be about 65% to 70% below the After Rehab Value (ARV) for a good discount. I will explain that later. You should keep the rehab costs between $10,000 and $12,000, which means that you want to avoid older homes that might need electrical or plumbing system replacements. Nothing sells better than single-family homes with three bedrooms and two baths. The best areas are working class neighborhoods where first-time homebuyers would want to live. Finally, most buyers will be looking for homes priced in the lower median through median range. Give the people what they want.
Getting Your Money Back
As an example, take a property that had an ARV of $150,000. Subtract 35% or $52,500, and you get a purchase price of $97,500. The reason you want to find property at this discount is that in order to get cash at closing, I advocate using a hard money lender to purchase the property, rehab it, and then either sell it again at $150,000 or refinance the property to put a new loan on it. Most hard money lenders will only loan 65% to 70% on the property. Some will loan on the After Rehab Value, and some will loan on the Fair Market Value. The key strategy for your success in flipping property is to work with lenders who loan on the ARV.
Surprisingly, this is one of the best markets for finding properties with this kind of discount transaction. Another benefit of using hard money lenders is that they will review the property value and estimate the rehab costs so you will have someone checking your work to make sure you got it right. To learn more about hard lenders please follow the link below.
Gary Fee
http://www.fast4close.com
Aquinas Company
21390 Bagby Road
Bowling Green, VA 22427The author invites you to visit:
http://www.fast4close.com
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