Savvy investors use ROI (Return On Investment) as the determining factor for real estate investments. ROI can be calculated by taking the Net Profits (Total Income - Total Expenses) and dividing by the purchase price. Industry standards put a ROI between 4% and 6% as the benchmark for a typical investor. When in reality, some investors are seeing ROI in the range of 8% to 12%. What are these investors doing that a normal investor is not?
Identify Target Markets
Obtaining a high ROI starts with making a good purchase. Buying rental units in affluent areas gives the landlord a higher quality tenant pool. The tradeoff is the rental property will be more expensive and the ROI will be on the low end. Buying rental units in severely poor areas gives the landlord a very low quality tenant pool. The tradeoff is the rental property will be extremely cheap and have rental problems, but ROI with be on the high end. The ROI is inflated by high returns but doesn't accurately reflect the amount of work and daily expenses to collect those returns. A successful investor knows how to identify target areas with affordable real estate and a high quality tenant pool to create the best possible ROI.
Aggressive Buying Tactics
Once the investor has identified a target market, they begin an aggressive campaign to get rental units for a good price. Obtaining a high ROI starts with making a smart purchase. Typically the successful investor is not afraid to purchase units that are otherwise discarded due to their condition. Short sales, foreclosures, sheriff auctions, estate sales, and investor portfolio liquidation should all be utilized along with conventional methods.
Creating Value
The best real estate opportunities for an investor will be properties that a conventional home buyer would not buy due to condition. The successful investor does not try to get by on the bare minimum when making improvements. The second part of the ROI equation starts with knowing what improvements will optimize the rental value. High quality tenants will want newer appliances, an updated kitchen, and a good bathroom. When deciding between hardwood floors and carpet, savvy investors will spend the extra money for hardwood floors. The target market will typically be a mix of high and low quality tenants. Savvy investors want their property to stand out to the high quality tenants.
Effective Marketing
Another area where successful investors feel their money is well spent is marketing. An effective Realtor will rent a property to a high quality tenant with speed and efficiency. Investors can use any one of the several websites and venues available to find tenants directly. Successful investors find that an effective agent will find good tenants that can pay top rental prices for good units. Never put a tenant in a property without a full background check.