Not every property is built equally. It’s a common-sense sentiment that goes double when it comes to finding the right investment property.

Whether you are restoring and flipping or looking for a long-term rental profit to build your portfolio and generate consistent revenue, finding the right property for you takes time and thorough consideration. 

The right investment property is one that works for you. That means accommodating your budget in all aspects of the acquisition from initial purchasing, tax, and renovations. Thorough budgeting and good financing deals can help you build your return on any property, but the perfect property will give you the maximum return on investment (ROI). 

Here are the steps you should take when finding the right real estate investment.

1. Find the right financing

Not every real estate investor will need or want the assistance of financing for their investment property. Determining if financing is right for you depends on your access to resources. Perhaps you are swapping a property through a 1031 exchange. Perhaps you have the cash flow to purchase outright. 

Financing allows you to reduce the risk on a property but it will also reduce your overall revenues. Over time, however, you can potentially build a greater investment portfolio while paying down your loans. After a few decades, you could see skyrocketing ROIs that give you a healthy income into retirement.

2. Find the right purchase price

A good determiner for pricing your potential investment property is the 1% rule. And no, we are not talking about billionaires (although, this rule could help you get there).

The 1% rule of real estate investment states that your property’s monthly rental income should be around 1% of the cost of the property. This number includes all overhead purchasing costs, like renovations and taxes.

For example, a $400,000 property would ideally generate revenue in the ballpark of $4,000. However, since local rents may make such fees unrealistic depending on the real estate market in your area, you want to adjust for time. The longer you hold a property, the more income potential you have.

3. Determine the capitalization rate

The capitalization rate, or cap rate, is an indicator of returns. Determining this rate is essential for budgeting and predicting the revenues of any potential property, and the calculation is relatively simple.

First, you need to find the annual net operating income. This is the income you will come away with after a year of maintenance, rental vacancies, and tax payments take away from the value generated by incoming rent. It is safer to low-ball this number than to make unrealistic expectations on the success of a property—but every market is different. Perhaps you can plan for a strong market in a low-vacancy region. 

Second, divide the annual net operating income by the current value of the property in question. This will give you a rate as a percentage. What you are looking for is a cap rate in the 4-10% range, giving you value similar to other long-term investments you could potentially make to build your portfolio. 

That $400,000 home, for example, rented at $2,000 per month, subtracting $5,000 in maintenance and costs, would have an operating income of $19,000. Divide this by 400,000, and you have a cap rate of 4.75%, just within the range you’re looking for, if on the low end. 

4.  Create a timeline

Another key to investment success is the length of time you plan to hold the property. Like with any investment, the longer your funds are held, the greater the potential for growth. However, real estate markets can be volatile and sometimes unpredictable. 

You need to create a timeline in which you are making a profit. If you’ve accepted financing, this could mean until your loans are paid off and your property has a growth rate pushing you into the black. If you’ve purchased with cash or have made an exchange, this could be just long enough to offset the 1% rule to help you generate the kind of income you should be generating. 

Every property is different and every investor is different. Your timeline should fit your needs and result in revenue growth. At the end of your planned investment timeline, reassess to determine if the property can still generate value for you. 

5. Plan for reinvestment

Finally, your investment property should serve your portfolio and increase your ability to reinvest. You want a revenue stream that allows you to turn around and reinvest in an even better deal, a better property, a better future. 

By finding the right property through financing, pricing, cap rate, and more, you can set yourself up with a secure investment that will build your wealth and enable you to keep growing your assets. If the property you’re looking at isn’t a stepping stone to this growth, it’s not the right one for you. 

Consult financial professionals when making real estate investment decisions, and for more information on real estate investment and property management, contact 208.properties today.