Signs an Investment Property Has Great Cash Flow Potential

Posted by Chris Clothier on Tue, Nov 1, 2016

investmentproperty-buyingproperties-realestateinvestment.jpgSo you’re a buy and hold investor. You’re not looking for a complicated flipping disaster, and you certainly don’t want to spend a fortune getting it right before you can start making money on the property. There are plenty of outside factors that can help you know that a property is going to be good—you can look to:

  • The neighborhood
  • The local economy
  • The competition
  • The demographics
  • The amenity proximity

Obviously, if a community and a city is doing well economically, it’s growing and thriving and seeing a rise in population, it’s likely you’re going to do well, too.

Those are the markets you’re going to want to be in. That’s the broad sense. But when you narrow it down and start looking at properties individually, what really makes that specific property good and another property not good for real estate investment?

What should you be looking for?

4 Signs a Property Has Great Cash Flow Potential

1. Size Sweet Spot

A good investment property is neither too big nor too small. The issue with being too small means that you’ll likely struggle with turnover when your tenant inevitably feels cramped or outgrows the space. While many renters start out as single people or young couples, they don’t usually stay that way for long. They’ll find partners and start families or start wanting to get pets. If they don’t have room to grow their families, they’ll move on to new homes.

The issue with properties that are too big, on the other hand, is that they begin to only appeal to larger families. There’s certainly a rental market for those families, but when you begin to have properties with four bedrooms or more, it gets harder to find tenants, or tenants that can find enough roommates to fill those rooms. That in itself can create some complicated issues. Between two and three bedrooms tends to be the sweet spot for rental properties. 

2. Sensical Layout

This is generally a problem with older homes, but even newer builds can be strange. A property that has an easy, flowing layout is a beautiful thing. When the layout is weird, cramped, or awkward, it can also lead to higher turnover. Because it’s just frustrating for tenants to live in! Over time, they just won’t want to deal with it anymore. It may not seem like a big deal to you if you aren’t living in it, but it’ll wear down someone who does.

3. Not Too Dated

When we say “dated,” we’re not talking about superficial things like fixtures and appearance. Those can all be changed over time, if you’re willing. We’re really talking about character homes. Old, old homes. Unless you have the dedication and the capital to rehab them and rent them out (or you’re a dedicated flipped and that’s your thing), you might want to avoid them. They tend to be big projects.

Older homes are much more likely to have problems, simply because of their age: asbestos, foundation issues, insulation issues, mold, and all manner of unseen problems. An inspection can uncover some of the problems, but at times, you might not know about them until you try to renovate something. That can end up costing you a lot of money to fix.

4. Comparable Values

When you’re looking for an investment property, the neighborhood is always a big consideration. Your competition in the area is also a consideration. If you were the rent out the property that you’re thinking about buying, what would you rent it for? Would it be competitive with the other properties in the area? After renovations, how would the value compare with the other properties in the neighborhood?

You want to be wary of outclassing everything around you.  The last thing you want to do is make a property so nice that you have to price the rent too high for the neighborhood.  Be smart and careful with your repairs to maximize value and rent and minimize future maintenance.

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Topics: investment property