Spotting an investment property that will ensure an appreciating real estate portfolio can take some savvy, but a few key tips can set you up for success. Keeping a close eye on potential trends, finding motivated sellers, and doing the work to crunch the numbers can make all the difference when spotting an investment property.
In a time of high interest rates and narrow margins, appreciation is more important than ever. That can be frustrating, since appreciation is one thing that investors have absolutely no control over.
But a smart investor knows there are ways to anticipate how much a property’s value will likely increase, from pinpointing the right metrics to following the correct on-the-ground hunches. It’s as much art as science, but in today’s market, it’s an increasingly necessary skill. Let’s look at some of the best ways to spot quality investment properties that’ll likely appreciate over time.
Keep A Close Eye On Trends
Look at the big demographic changes and population shifts that have driven the U.S. housing market over the past decade. If you’d known what America’s best cities for hybrid workers were five years ago, or that Florida and Idaho would see so much in-migration, you’d have an elite portfolio today. While it’s too late to get in on the ground floor of those trends, there’s always a next wave— one of your most important jobs, as a savvy investor, is to spot it early.
How do you do that? If there were an easy answer to that question, we’d all be wealthy real estate investors. Trend forecasting can be challenging, but there are early indicators that can be significant. Examining city-wide migration trends can reveal areas that are ripe for appreciation, as well as areas that are experiencing a surge in new businesses. Big infrastructure or transportation projects in the pipeline — even if they’re years away — can also be a great sign of future value.
Get In Early
Timing is everything. When an area is hot, you’ve already missed the big early returns; by the time a neighborhood pops up on a best neighborhoods for Airbnb investment list, you’re already going to be paying a premium. If you have a solid hunch, don’t wait until the rest of the market confirms it.
Crunch The Numbers
A lot of savvy property investment involves the boring drudgework of doing math. Here are a few of the most important numbers you’ll want to look at.
Learn more: Property Management Math | Easy Equations for Reports and Analysis
Net Operating Income (NOI)
This is essentially a measure of the cash flow you’ll have after accounting for operating expenses. To calculate your NOI, you’ll want to subtract all your expenses (minus capital expenditures like taxes and mortgage payments) from all your income from the investment. The reason you don’t include mortgage payments in this calculation is that NOI is basically a metric to tell you whether the building’s net income will be enough to cover the mortgage. If it isn’t, the property is probably not a great deal.
Cap Rate
The capitalization rate is one way of measuring your profit. To calculate it, divide your NOI by the property’s value. A high cap rate suggests high returns and high risk; a low cap rate indicates a safe investment with a lower profit rate.
Cash-On-Cash Return
This metric is useful because it tells you your return on the actual cash you’ve invested in the property; it’s also useful because it’s one of the only metrics that takes your mortgage payments into account.
To calculate cash on cash return, divide your cash flow after mortgage payment, and divide it by the amount of cash you have invested in the deal. To calculate how much cash you have in a property, take the price you paid, subtract the outstanding mortgage balance, and add any capital improvements.
Don’t Fixate Too Much On The Abstract
Metrics such as cap rate, cash-on-cash return, and NOI can definitely tell you a lot about a property’s investment potential. But they don’t tell the entire story. Before you pull the trigger on any investment, take the time to go check the on-the-ground conditions.
Variables like traffic and neighborhood vibe don’t show up on Google Maps. Look over the property at different times of day, and on weekends and weekdays. Is it as good in real life as it seems on paper?
Closely Inspect The Property
Investors sometimes get so caught up in neighborhood and city-wide trends that they only give the property itself a cursory glance. Don’t make that mistake. Regardless of what the bigger picture suggests, look at the property with an objective eye. For serious prospects, consider hiring a professional home inspector to accompany you and provide a detailed report.
A perfectly located property that’s set to appreciate wildly won’t be as profitable if you have to invest a significant amount in major repairs and renovations. Ensure that major features, such as the roof and foundation, are in good condition, and assess the extent of necessary renovations and modernizations to bring the property up to high standards. Loop in your contractor if it looks like you’ll need to do a lot of work; professional estimates are always going to be more accurate than your back-of-the-envelope math.
Fundamentals Matter
While tools like ROI calculators and advanced analytics can give you an edge in a competitive market, a lot of what makes a good investment comes down to basic fundamental qualities. Look at the lists of best places to live in the US and you’ll quickly see that they have a lot in common.
Factors such as a strong local economy, low crime rates, a central location with access to quality schools and public transportation, and numerous amenities are more durable indicators of value than fleeting trends. If you can snag an investment property that checks all these boxes, it will almost certainly be a good long-term deal, even if it may not appear on the latest lists of up-and-coming neighborhoods.
Look For Motivated Sellers
The rate of appreciation matters less if you get a great price on your initial investment. There are a number of ways to find discounted properties, from looking at foreclosure auctions to hunting for distressed or dilapidated properties for repair. But one of the best is to find motivated sellers; anyone who’s Googling “how to sell my house fast” is a seller you should be seeking out.
The most reliable way to do this is to build up a network of informed professionals. Local lawyers can tip you off about properties involved in recent divorces or inheritances that need to be sold quickly, and at a discount. If you really want to hustle, you could put up fliers or employ property scouts.
