Another new year’s resolution for me this year was to obtain my real estate broker’s license. My fiancé, Jordan, and I are looking to buy our first house and have also become interested in the market for rental properties. There is a wealth of information and data already out there about real estate investing, including calculators for analyzing potential rental properties. However, to help me better understand the process, I will be breaking apart these analyses and creating my own tools, which I will present in a series of blog posts.
There are five main steps in the real estate investment process:
This first post will focus on finding potential investments. While the price of the property is important, it is only one of the factors an investor should consider. Others include:
- Cash flow opportunity
- Likelihood of appreciation
- Maintenance costs
These factors often vary based on the market and one method of quickly evaluating markets is the price-to-rent (PTR) ratio. This ratio represents the relationship between the cost to purchase a home and the cost to rent. The PTR ratio is a double-edged sword because a lower PTR ratio could signal higher cash flow opportunities, but it also means that it is cheaper for individuals in that market to buy a home than it is to rent. Therefore, the ratio should only be used as a broad tool for narrowing down the zip code(s) an investor should target for potential properties.
(click to interact with the data)
Within the given zip code, an investor should still consider the mix of property types available and whether these meet their investment criteria. For example, investors who want to focus on building their net worth will often choose to buy single-family homes, whereas those who prioritize cash flow will often search for multifamily structures. Some markets may no longer zone parcels for multi-family homes, and therefore, the only available properties will be older and require higher maintenance costs. However, properties in poor condition may also offer opportunities for discounted prices. Investors should have a clear plan for the characteristics they are looking for in a property beyond something like a PTR analysis.
Stay tuned for more real estate tools and updates!