Pinpointing The Best Type Of Property For Your Real Estate Portfolio
What are the best types of properties to add to your investment portfolio?
Each investor may have their own unique goals and timelines and asset allocation formula. Yet, there are many common themes that are shared and should be on your checklist when adding real estate to your portfolio.
To get the diversification and best benefits out of investing in real estate, it is smart to look at the income, tangible security, and tax benefits of investing in real estate. However, that still leaves investors a very open map. Watch these critical factors for success and find a balance to select the best real estate investments.
Too Cheap Vs. Too Expensive Pinpointing The Best Type Of Property For Your Real Estate Portfolio
Some investors are still gravitating toward what was once considered ultra-prime real estate in major gateway cities. It’s extremely expensive. Not just in terms of the price tag, but the resulting yields. You should be getting more than from a bank savings account or bonds.
At the other end of the spectrum, there are probably still properties available for under $10,000. In a few areas, there may be $1 properties or homes being given away for free. There are good reasons for these cheap price tags. Typically, because they can require far more investment to fix than they are sold for. A $50,000 rental home may sound good until you realize you have to put $70,000 in cash into it to fix it, and clear past-due taxes and code violation liens.
Find an ultra-prime balance, where you are getting real value.
The average credit quality of tenants can vary widely by neighborhood. You can’t hold out for 700 credit score tenants if the local average is just 620. The potential cash flow on paper might look good in one area, but can be meaningless if local tenant performance is atrocious. If you have high eviction rates and management will be extremely intensive, you may have been more profitable investing in a slightly better area.
On the other hand, investing in a very affluent area may land you the most qualified tenants with strong income and better average credit scores. This again is a trade-off. The strongest tenants have their pick of any property they want and have a lot of negotiating power. If you are giving it all away in special deals and negotiations, you may not profit a penny more.
Find balance in performance.
Appreciation Vs. Depreciation
At the fringes of both ends of the spectrum, investors can find an elevated risk of depreciation. It sounds good on your taxes. Not so much when your portfolio balance can be split in half instead of doubling. Watch out for markets that have become so expensive they are facing a correction, as well as the least desirable neighborhoods, which can see values decline, even if the promised cash flow looks nice on paper.
You can’t guarantee any property will continue to go up forever. Yet appreciation is one of the best-added benefits of investing in real estate. It’s passive wealth building. You can pick properties with the least risk of declining, which are going to be the least volatile, and should continue to appreciate over the long term.
You can also find value add properties that can enable you to walk into extra equity and create your own equity, without taking on too much risk.