Is the American economy on its way towards recovery or is it poised for another meltdown? And will they ever figure out this “fiscal cliff”? I’m sure everyone in North America and around the world for that matter are hearing the constant “noise” through media outlets. The big question on a lot of minds are “is there money to be made in American real estate”? I believe there is.
However, I feel the sophisticated investors who do their due diligence will continue to do well while the ones who speculate (hope things work out), could get into more trouble now then ever. Although these rules generally apply to any market, they are especially true in the US. So, what would my strategy be if I were an American real estate investor buying a rental property?
I would be specializing in a state that’s growing faster than the national average. I would be looking for 1. GDP growth 2. Job growth and 3. Population growth. It’s surprising how many “real estate investors” never look at these 3 simple indicators before buying a rental property. Once I found a state that is performing well, I would narrow my focus even further to ONE particular town within that state. Again, I am looking for the 3 key economic drivers (stated above) but this time, I want these numbers to exceed that of the particular state’s averages. What’s next? You guessed it! I would narrow my focus even further to a neighborhood with the lowest vacancy rates based around the type of investment I specialize in i.e. Single-family, condo’s, multi-family etc. Every real estate investor should have this memorized: GDP growth leads to job growth, which leads to population growth, which leads to rental demand. A great tip I learned from Don R. Campbell, president of the Real Estate Investment Network here in Canada.
2. Buy for Mortgage Pay Down
What I mean by buying for mortgage pay down is to invest in a neighborhood where you will have no problem keeping your rental filled all year long. If you’re investing in long-term real estate, mortgage pay down should be priority number one! Your primary focus should never be appreciation or buying in an area because homes are “cheap”. Buy for cash flow TODAY! The appreciation is just the cherry on top when you’re ready to sell or refinance.
3. Cash Flow is King!
Now that you are an expert in your niche market, be sure to buy property that will cash flow immediately upon finding a tenant. Don’t buy a property because your buddy or realtor said it was a good deal. Run the numbers before you visit the property to avoid wasting your time, or have your specialized realtor learn your system. Here’s how a sophisticated investor calculates for cash flow. Add up your mortgage payments, taxes, condo fees (if applicable), insurance, property management, 5% vacancy and 5% maintenance. The 5% vacancy and maintenance gets stored in what I like to call your “rainy day fund” for emergencies. Store that money in a separate account and never touch it unless you have to! Because you are an expert in your market, you know exactly what rents go for in that area. If the rent is higher than these calculations and your property cash flows to your liking, you may have a great investment.
4. Ride the Wave!
Despite all the real estate and economic “noise” there are still many markets that are doing well. I am by no means an expert in US real estate but I do know when to “look behind the curtain” when reading newspapers. Look for areas such as Miami, which has seen great population growth due to immigrants (many of them Canadians) buying second homes as well as Phoenix. Do your due diligence, focus on cash flow and “ride the wave”. The markets will go back up, they always do. As Warren Buffet always says “Be fearful when others are greedy and greedy when others are fearful”. Hint, everyone is fearful right now, so provide them with a place to rent!