There are a few different types of residential real estate investments, that if chosen and executed correctly, can turn into an extremely fruitful venture. One of the most popular methods is to purchase a house or apartment and then rent it out monthly or daily (Air B&B, VRBO). Another common method is to buy a 'fixer-upper' (rundown property in need of repairs) and make the necessary repairs and upgrades, then sell the house at a profit. Depending on the investment, there are a few tips and tricks that can help you accurately evaluate a potential investment property, as well as protect yourself, and your investment from future loss. Real estate is one of the most common investments you can make for good reason, it has unique characteristics that you won't find in other investments.
Real estate is a unique investment in a number of different ways; the fact that it's a physical investment where you can have a literal hand in upgrading and altering it is one thing, but let's not forget Mark Twain's famous words, 'Buy land, they're not making it anymore'. Anytime you can invest in a finite resource (such as land) your returns will automatically have a higher floor in comparison to other investments. Depending on your desired path, there are different first steps to take when considering a property for investing.
If your interested in flipping a property (buying low, fixing it up, then selling high) then you want to focus on a combination of different factors such as: value of area (ex: Trinidad vs Manila), property restrictions (CC&R's, coastal zone, etc) extent of work needed, buy-in price, and more. Flipping properties is a great option for contractors and handymen alike because your profit margins are increased given the reduced labor costs. There are a few parameters to be aware of such as local building codes and occupancy timelines, among others. As with any new venture, having the knowledge to avoid potential pitfalls can be the difference between success and failure.
If you'd prefer something in better condition for a rental property, then there's a separate set of filters one should use when house hunting. A newer house would help to mitigate repair/upkeep costs and a multi-unit property (duplex, triplex etc) would bring in a higher monthly rent. However, a smaller unit situated in a neighborhood with high foot traffic, like the Arcata Plaza or Old Town Eureka, could provide the best return on your investment. It all boils down to selecting the right investment and utilizing its highest and best use.
Some of the most profitable real estate investments are executed using foreclosure-like properties. There's a handful of terms used to reference foreclosure sales, such as judicial or nonjudicial foreclosure (homeowner stops making payments so the lender sells the house for a discounted price to recoup their losses), REO Sale (real Estate Owned by Bank), Sale by Public Guardian (County Office of the Public Guardian is authorized by the Superior court to sell a property on the behalf of the Conservatee), Court Auction Sale, Internet Auction Sale, HUD Foreclosure (foreclosure of a property financed with a HUD loan) or Short Sale (homeowner has been given notice of default and they are attempting to sell the property before it is foreclosed upon). All of these sales would show up on your counties MLS site, but if you want specific alerts, there's a few national sites (listed below) where you can sign up for updates when a listing comes on the market in your area.
Once you've become familiar with your desired property, it's extremely important to under stand the specific guidelines that your transaction would adhere to. Every foreclosure company does things differently, and every auction site has different requirements to make a bid. For example, just before writing this, my client and I submitted an offer on a house for sale by the Humboldt County Public Guardian. Accompanying our offer was a required cashiers check for 10% of our purposed purchase price, to serve as our EMD (Ernest Money Deposit). As you could guess, its very beneficial to have an agent that can decipher all of the different deadlines and requirements so you can save you a lot of time, and potential money. It also helps if that agent (cough cough) is familiar with the various tools that you need to gauge a properties investment worthiness.
Real Estate investing can be a very competitive marketplace and the best way to have a leg up on the competition is by having an expeditious advantage. One of the easiest ways to ensure you hear about the newest listings as soon as they hit the market, is to have a local real estate agent (me obviously) set you up with automatic updates from our counties MLS site. The sooner you see the investment property, the quicker your decision can be made. Once you've identified a strong potential investment, you would begin researching the properties merits in hopes to clarify it's profitability.
Every income property should have profit & loss statements that show the properties monthly income. These data sheets can help to gauge if a property has consistent rental history or has sizeable vacancy gaps. If the proposed property has solid income history, you can then begin to calculate if the investment is worth your time.
When determining if a property is worth investing in, one of the most commonly used tools is a capitalization rate calculation. The calculation essentially looks at the monthly upkeep costs and expenses (property management, utilities, insurance, vacancy, etc) and compares those figures with the monthly income and the current market value of the property. Once calculated you will end up with a cap rate that will give you a pretty accurate idea of the properties potential. Humboldt County usually produces rates between 2-8%, the higher the cap rate, the better the investment. If you are interested in an investment property and would like to find out the cap rate please let me know!
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Brandon Brown, RE/MAX Humboldt Realty CA DRE License #: BRE#02031396
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