How To Identify Your Next Investment Property

Selecting which investment property to buy is the single most consequential decision a borrower makes in any project. Borrowers who spend time and effort in the selection process have the best chance to maximize their return. Those who don’t are setting themselves up for a potential loss.

The first stage of the selection process is to put together a shortlist of potential investment properties. From there, borrowers can dig deep into specific properties and determine which one offers the greatest opportunity.

However, before putting together a short list, borrowers have to set their budget for what they can afford to buy. They need to know what cash they’re willing to put into the project. Additionally, they need to have a general idea of what kind of loan they can get. Understanding these numbers defines the price range for the investment property.

With the price range of the investment cost defined, borrowers can now focus their search efforts in the right areas.

How to find investment properties for the shortlist

The most common place for borrowers to start looking for investment properties is the same place that home buyers use. Online real estate search engine sites like Redfin, Zillow, and Trulia have a range of features that make it easy to filter your searches. Looking through results on real estate search engines will also provide insight into potential resale values. Borrowers might also want to check out foreclosure sites like Auction and CraigsList, as well as industry specific groups on social media.

While the real estate search engines are one option, there’s no reason for a borrower to remain a passive searcher. Once a borrower identifies a target areas, they can run a direct mail campaign to homes in the area. Direct mail has a reputation for being out-of-date, but the truth is that they get more responses than email campaigns. The Direct Marketing Association analyzed data comparing direct mail and email campaigns and found that the direct mail achieved a 4.4% response rate to email’s 0.12% response rate. The plethora of online postcard design and print services (like here, here, and here) makes getting professional-looking postcards very easy and very cheap. These postcards can also be left at interesting properties as calling cards.

Another useful method for finding properties is through digital advertising. Google, Facebook, and LinkedIn all let advertisers filter the display of their ads by zip code and other demographic criteria. Creating and running a digital campaign takes a bit more knowledge than a direct mail campaign but can be a fruitful way to find under the radar properties.

Selection criteria to narrow the field

Borrowers should take specific properties through these selection criteria to start honing in on their next investment property.

Look for indicators that the owner may be eager to sell

Rental properties or homes that are empty are often signs that the property owner could be amenable to selling. Out-of-state property owners can be valuable targets as they may not want the burden of maintaining oversight. Nor may they have a current sense of what the local comps are in the area, which increases opportunity for an exceptional buy price.  You can find out-of-state property owners through tax records. Sites like PropertyShark aggregate public tax and property information, making searching easier.

What is the state of the property’s disrepair

The best flips are properties that only need cosmetic updates. Freshening up the cosmetics of a home offers the highest return for a minimal rehab budget and on the quickest timeline. If a rehab requires electric or plumbing work, budgets and schedules explode. Borrowers can make some educated estimates based on a walk-through before deciding which homes merit an inspection.

The key is for the borrower to assess whether the scope of rehab required fits within their identified budget and turnaround timeline. For example, a total gut on a small house in a growing neighborhood may fit a borrower’s budget, where a complete gut on a larger property would not. The square footage of the home directly impacts the budget, which means less square footage may provide room in the budget for more than cosmetic updates.

What are the property’s value-add opportunities?

A property’s resale price is dependent on what value-add work has been done to justify the borrower asking a higher sales price than their buy price. How broad or complicated is the scope of work that needs to be done to a house to make it move-in ready for buyers who don’t want to do any of the work? That’s where the added value is. Finding the most cost-effective rehab appreciation opportunities will help highlight the properties with the most significant investment potential.

Finding the investment property that works

Newer or more conservative borrowers may prefer to stick with low-risk, simple cosmetic rehab projects on a low-end property, while more aggressive borrowers may be willing to gut a luxury home. The smart borrowers set their numbers and use them as threshold filters to shortlist a property. Then run those properties through these more refined criteria. The right investment property is one that works in a specific borrower’s budget while offering an acceptable rate of return.