Real estate can still be one of the most attractive options for investors, even in a down economy.  Today’s savvy real estate investor needs to perform much more due diligence in this type of market than in years past. Today’s market is a different world filled with foreclosures and short sales; market expertise is now more crucial than ever before. It’s no secret that there are pitfalls abound, yet the rewards to those who put in the necessary footwork can be very gratifying. “If past history was all there was to the game, the richest people would be librarians.” -Warren Buffett

First and foremost, before setting up a real estate investment plan, you will need to determine the price range that fits your investment criteria. If you only have a limited amount available to invest, that could help determine the potential area before further criteria is investigated. Of course on the other hand, if your budget has a high limit, it can not only mean you have more homes available, but could also determine the areas that are available to you. You may want to set up a strategy for 10 homes in an average neighborhood, or 5 homes in a more affluent area…we can help you customize a plan that is tailored to your personal investment goals.

After determining your investment tolerance, you will need to fully examine the areas that fit your criteria.  There are numerous considerations when researching an investment property, so let’s take a look at the top 10 things you should consider when searching for the right one:

•Amount of Listings and Vacancies

A high number of listings in a particular area could spell trouble for a landlord. That either means the rental season has passed, or the neighborhood may be turning to a “rentals only” neighborhood. Determining which of these is happening is crucial in your strategy. If it is a seasonal issue, you may want to determine when exactly would be the best time for purchase. In some neighborhoods, looking at the school schedule can be helpful.

Rents are very dependent on supply and demand, so just as in buying a home the number of homes available lowers the potential rent. Finding a neighborhood that has a low vacancy rate can lower your days on market and improve your annual rate of return.

•Employment

Areas with growing employment opportunities tend to attract more people, meaning more tenants. Examine the average local commute time to the employment sectors, tenants like to live close to work which means higher rents and lower vacancies. The U.S Bureau of Labor Statistics is a good place to research rates, or take a look at the large employers in the immediate area. Areas with schools, hospitals, large scale manufacturing, retail and restaurants tend to draw more renters. Keep an eye on the local papers (online as well) to see if employers are planning on opening facilities in the area, new facilities mean new workers…and new tenants.

•Market Rents

Knowing what a potential renter will expect when they view your home is very important. Tenants are very astute these days with the amount of information available online, and are doing more and more research before they go out looking. Be familiar with what the average rent would be for your square footage, and use that as a benchmark when determining your formulas.  Some homes may require additional repairs than in other neighborhoods so prepare your calculations accordingly. Reviewing the rental rate history of the area will give you a picture of what to expect down the road.

•Neighborhoods

Neighborhood quality is a huge factor that can affect other items you will need to examine as well. This can be the benchmark for what type of renters you will attract and what type of vacancy rates you will face. In Tempe for example, rental rates fluctuate greatly with the ASU semester schedule. Many students return home for the summer, thus raising the vacancy rates and lowering potential rents.

•Crime

Owning a rental home in an area with a high crime rate can cause some major headaches for landlords. Check out the local police department’s website for information on crime statistics in an area. Examining the recent activity versus the past few years should give you an idea in determining if the area is improving or not. Visiting the area during various times of the day and evening should also help give you a sense of the criminal activity. If you are lucky enough to speak with a local policeman, they should be able to give you an idea of the areas to stay away from.

•Schools

Many tenants these days have larger families than years previous, so the local school ratings are becoming increasingly important. Conducting online research is fairly easy when rating a school district, but conduction physical research may be helpful as well. Take a look at the prominent elementary and high schools in the area…although you are mainly concerned about cashflow today, this could be a major factor once you decide to sell the home one day.

•Amenities

Drive and search online for surrounding parks, shopping centers, restaurants, and other area attractions that would attract potential renters.  A good place to start is the city’s website and by “googling” the zip code to find out what’s in the immediate area. Some neighborhoods feature community pools and other amenities with the HOA dues, but be cautious as HOA fees are paid by the landlord and a high HOA fee can hurt your monthly return. Most suburban neighborhoods are less than $50 a month, but if there are amenities included those rates can jump much higher.

• Future Development

If there are new condo communities, shopping centers or commercial condos going up in an area, that is a good sign that it is a growth area.  The local municipal planning department will have information on all the future development that is coming or has been planned for the area. However, look out for new development projects that could hurt the ”rentability” of the area which would make finding a tenant more difficult. If there are many new apartment projects planned, then it may be much tougher to find a renter as you will have corporate, big budget landlord competition.

•Homeowners Associations

HOAs are pretty much standard in neighborhoods built within the last 10 years, so understanding their role in your investment is very important. A high HOA rate could lower your return, but it could also mean extra included amenities which may lower your vacancy rate. If an HOA is higher than normal for an area, and the amenities do not cater well to tenants, you may want to avoid the neighborhood. However, if a neighborhood has a low HOA and it’s obvious that the bylaws are not being enforced (weeds in yards, immobile vehicles in driveways, garbage containers visible, etc) you may want to avoid the neighborhood as well…resale could be a problem down the road.

•Property Taxes

Property taxes can vary from one municipality to another, but generally run about $100 per month in most rental areas ($1200/year). Examining the tax history can be helpful in determining future tax rates. Looking up the local tax information is very easy as Maricopa and Pinal counties have easy to use websites that allow individual parcel number searches.

Getting Information from the Neighbors

Many times investors will talk to local homeowners but avoid tenants, which is a mistake. Tenants will be very candid about the area and give you a clear picture of what’s really happening since they have no ownership stake in it. Visiting the neighborhood throughout different times of the day will give you a higher probable chance of meeting some chatty residents.

The Actual Property

What we’ve found to work the best for investors in terms of cashflow is single family residences. The HOA fees are typically much lower than condos and the tenant is responsible for the landscape maintenance. True, with condos you don’t have to worry about the landscaping, but we make sure that the tenant is aware that if the grounds are not maintained that they will be paying any HOA fees that are incurred. Single family homes also limit the amount of competition that condos face from apartment communities.  

Single family homes  tend to attract longer term renters, especially in the newer, suburban communities. For this reason we recommend looking to the newer, outlying areas of town, predominantly referred to as the “boom areas”. These are the Phoenix suburbs that experienced tremendous growth during our real estate boom, and therefore many homes are less than 10 years old, meaning less maintenance for the landlord. Now, some of these areas work much better than others in terms of cashflow and low days on market, and we would be happy to discuss these communities with you personally. These areas are also predicted to appreciate well in the next 5-10 years.

Now, condos can still be a nice investment option as well, when purchased in the right area. With condos you need to remember that you are buying the “community” as much as the “unit” itself. Certain areas of the Valley cater towards condo living much better than others, and with Phoenix being the very definition of “urban sprawl” this becomes a very important factor. A condo might be a great option for the buyer looking to use the unit personally down the road. We have many clients that are still a few years out from retirement, and want a low cost vacation home with amenities once they are ready to give up the working life…for those buyers, condos are a great option.

There are many deals still to be had, and the rental market continues to strengthen in the Phoenix Metro area. The traditional real estate investing principles still hold true, and those that do things the right way will look back and be glad that they were the ones that took action.