A Smarter Way to Find Good Investment Properties
Someone posted on a popular real estate investment platform, venting the frustration of having to kiss hundreds (if not thousands) of toads before finding a good investment property. Here is a portion of what they said:
“I've been thinking a lot lately about the sheer amount of time and effort that goes into the front end of our business – identifying potential deals and doing that initial analysis before deciding if something is worth a deeper dive.
We all juggle different platforms (MLS, Zillow, Redfin, LoopNet, maybe specialized tools?), spreadsheets, market reports, city data, etc. It feels like a constant cycle of filtering, cross-referencing, calculating, and trying to connect the dots. It got me wondering about efficiency and whether there's a smarter way. Imagine if you could skip some of the tedious filtering and data hunting…”
Yes, there is a smarter way to find good investment properties.
The first order of business is to clarify what a good investment property is.
What Is a Good Investment Property?
A good investment property is not about a low price or what you (or your friends and family) like. Real estate investing, like any other investment, is about financial performance. Some common fallacies.
- Properties pay rent. Properties don't pay rent—tenants do.
- Not all tenants behave the same.
- Real estate is local, not national—what works in Boston might fail in Houston.
- Your opinion does not matter. Only what the tenant wants matters.
You will not optimize your investment dollar if you believe any of these fallacies. You need to look at everything from a financial point of view. So, what is a good rental property?
A good rental property attracts a tenant segment with a high concentration of reliable tenants. A reliable tenant stays many years, pays the rent on schedule, and takes good care of the property.
Noticed that I did not describe the property in terms of property type, location, configuration, or rent range. You do not determine these items. Let your target tenant demographic (your customer) define everything.
To find a good investment property, first identify a promising tenant segment—a subgroup within the renting population that has a high concentration of reliable people. How can you identify this segment? Interview multiple experienced property managers and ask them: "If you wanted to buy investment properties where most tenants stay multiple years, pay rent on schedule, and take good care of the property, what and where would you buy?"
Notice how the question focuses on tenant performance rather than your feelings or impressions. When researching which tenant segment to target in 2005, I interviewed about 15 property managers with this same question. 13 out of 15 property managers identified the same properties.
Once I knew what and where reliable tenants rented, I created what I call a property profile. A property profile contains at least the following four elements.
- Property type: The type of properties they currently rent, such as condos, high-rises, multi-family homes, or single-family homes.
- Configuration: Two bedrooms, a three-car garage, a large backyard, or a single or two-story home.
- Rent range: The rent range of these properties.
- Location: The locations where significant percentages of the target segment currently reside.
For example, in Las Vegas, what keeps tenants in the property for many years is young children. So, our property profile is wrapped around families. Below is a subset of our property profile, which today contains approximately 40 elements.
- Type: Single-family
- Configuration: 3+ bedrooms, 2+ baths, 2+ car garages, 1,100 to 2,400 SF, one or two stories, lot size 3,000 SF to 6,000 SF.
- Rent range: $1,900/Mo to $2,300/Mo
- Location: See the map below for the locations of many of our clients' properties.
Let me be clear: I did not choose the property type, location, configuration, or rent range. Instead, I followed the same approach that national retail store chains use—I identified my target customer first (reliable people who stay many years), then provided exactly what they were willing and able to rent.
Once you have a target property profile, instead of evaluating thousands of properties, you can focus on only a few hundred, knowing that these will likely perform. Of course, there is still much more work to filter these properties further, but you’ve already gained a massive head start.
Summary
Before you set out to look for investment properties, take the time to clarify what a good investment property is. Develop a property profile for your target investment properties, and focus only on conforming properties.
Next week, we will release our monthly market report for May and look at the state of the Las Vegas housing market, following the roller-coaster of the financial market in April.
