Choosing the right property in Hawaii to match your investment style can be tricky, especially if you are new to real estate investing and are unfamiliar with the island of Oahu. With so many things to consider, how do you determine what property will best line up with your goals. This guide is the second of a five part series that discusses different strategies and how they impact your goals as a landlord.
We have all heard location, location, location. But how important is it really?
Its probably one of the most important decisions you will make as an investor. If you have a limited amount of time, this is the area that you want to focus on. Top things to consider when choosing the right location is local crime statistics, average rent, schools, and turnover rates. Each of these will impact the type of tenant that will be attracted to the property (which will be discussed later in this series), turnover rates and the overall quality of tenant that you are looking for.
Location has a direct impact on your investment style. Unless you happen to buy the property at the best possible time, the average investor will find that cash flow and appreciation often have a reverse effect on the other.
Areas that have high appreciation rates often have a lower return on the monthly cash flow while areas that tend to have higher cash flow tend to have lower appreciation. This is mainly due to the fact that the cost to purchase a property in a highly desirable neighborhood is often inflated because it’s in high demand. In general, these areas appreciate more quickly due to the increased demand but the return on investment (ROI) for the monthly cash flow is lower because the property costs more. Additionally, these properties may require more upgrades such as granite counter tops, higher quality carpet, nicer faucets, etc. All of which costs more money to purchase and replace.
Properties that appreciate quickly will often be located communities that have lower crime rates, better ranked schools, and more upgrades.
A widely accepted real estate principle is that smallest house in the neighborhood often appreciates the most. The driving factor is that the larger homes will typically sell for more money often driving up the overall value in the community. This also increases the rent for the area as well, but size does impact the type of tenant that is attracted to the property and turnover rates. A growing family can’t stay in that two bedroom condo forever and that single bachelor probably won’t stay single for long.
Areas that produce a higher ROI for the monthly cash flow are often in areas that are in lower demand and cheaper to purchase. One thing to consider, however is that the type of tenant which can have a huge impact on your cash flow if they start costing you too much money due to increased repair costs or turnover rates.
Its important to know what the average rent is for the area you are considering, how long the average tenant will live in a property, and the length of time it normally takes to lease the property in that neighborhood. These factors will help you determine how often you will have to prep the property in between tenants while considering the vacancy costs in order to decide if the cash flow generates enough monthly income to meet your investment goals based on your target ROI.
Those inbetweeners have their homework cut out for them. They have to find a property located in an area with decent schools, average crime rates for the city / region, rent amounts, turnover rates, etc. These properties need to be well rounded in order to have the highest success rate which requires more time researching and analyzing the area which can be difficult if you are an investor who is new to the city / region.
In closing, each strategy requires research to find the best location for their overall goal. This has a direct impact on the type of tenant, ROI, and appreciation rate which are three areas that real estate investor’s area always looking to improve.
December 9, 2013