How to Recognize a Real Estate Investment
Something that real estate mentors discuss all the time is how to transform your daily work commute into an opportunity to spot a potential investment property. Houses and businesses that you have been driving past every day are suddenly transformed into a potential investment property.
Finding real estate properties that you can buy and sell with minimal effort and high margins is not always easy. To determine if a property is a good real estate investment, you need to look at key factors such as location, condition, zoning issues, cap rate, renovation/repair costs, and appraisal value.
Below, we provide a potential investment property checklist on how to tell if an investment property is a good buy.
Assess the Asking Price vs the Property Appraisal Value
If you want to save a lot of time on the front end, you can analyze investment property potential simply by looking up the address and clicking on the appraisal district website. Simply type in the real estate property address and look at the selling price. If the seller price is substantially below the appraisal value, you’ll likely profit when you buy and sell the house.
Keep in mind that a house’s actual value – which can be assessed using a variety of methods – is never set in stone. If you don’t like the current asking price, market value, or property appraisal value, then keep your eye on the property and check back in a month or two.
Look at the Overall Condition and Presentation of the Property
A property is only as valuable as its structural integrity and curb appeal. If you are looking to score your first real estate investment deal, then you need to get a sense of the condition and presentation of the property. For instance, is the current owner listing and promoting the property? Have they made renovations in the exterior or landscape?
If not, this may be a good sign that you can buy the property at a healthy discount. A property in poor condition gives you leverage to negotiate a real estate deal so that you can turn a profit. So, if you are interested in a property, make sure you do a thorough walkthrough so that you can assess the overall condition of the house.
Check the Capitalization (Cap) Rate
In the world of real estate, the capitalization rate or cap rate is the rate of return that you can expect to generate on a piece of real estate property. There are a few ways to calculate the cap rate, but the most straightforward is to divide the net operating income by the property asset value.
The cap rate can be valuable if you are looking to invest in a rental property or commercial property. However, if you are quickly assessing or comparing a potential real estate investment, do not use the cap rate as the sole indicator of a property’s potential. Instead, use it in tandem with other methods as you learn how to evaluate a potential real estate investment.
Stay Away from Mainstream Media and Social Media Hype
Let’s be honest: We all watch HGTV from time to time. We also scour the web and social media sites for deals and useful information. However, a lot of what we see on TV or online is hype that is not grounded in actual day-to-day real estate deals. Much of it is based on expectations that are not realistic by any stretch.
Social media can also expose you to real estate ‘experts’ who are more interested in your money than in providing useful real estate investment information. If you want to learn how to spot a good real estate investment opportunity, then look for real estate investment training or a real estate mentor that can teach you how to buy and sell houses simply and effectively.
Speak with the Property Owner
After you have completed all of the background research on the property, you may be able to fill in any gaps or get more information simply by setting up a meeting with the property owner. The owner’s situation may tell you all you need to know about whether the house is a solid real estate investment opportunity.
For instance, the seller may be desperate to sell the house right away due to a new job, divorce, or the threat of foreclosure. This gives you negotiating power. You may be able to convince the owner to lower the asking price or compromise on a few of the selling conditions. Make sure that you do as much homework as possible before you meet with the owner so that you can be prepared for any scenario.
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