Cash flow is paramount and indeed much needed but a great equity play can provide for greater wealth than any cash flow itself. Of course because equity tends to be more speculative in nature you always want to consider your exit strategy first and identify who your potential buyer will be at the time of exit.
As today’s market has reached the equity growth phase, people are putting more and more focus on the equity growth opportunities of their investment. To be successful and capitalize on the equity of an investment you must first start with the end in mind.
To gain maximum return in equity you want to insure the end user (your buyer) will be willing to pay you top dollar for your property. So how can you possible know this in advance? It all starts with knowing what your end user will want to purchase. Think of supply and demand. The more demand for your property the higher price you can demand for it.
Study the buying habits of buyers in your chosen market. What types of properties are they looking for?
- Realtors or news articles: Both can offer a great look into buying trends. For example, I recently read an article that the high cost of gasoline is causing more and more people to move into the urban areas. As a real estate professional I of course witness this first hand talking with buyers so either source is a great start. Long and costly commutes are changing the way some buyers buy. This of course is demographically different throughout the country so you want to understand who your buyers are in your chosen market.
- Single family, multifamily, condo or town home: This may vary by market so you will want to do your diligence to be sure. The single family home is typically the most highly sought after property. This of course translates into best retail pricing.
- Beds and baths: While a two-bedroom home may produce a decent cash flow three or four bedrooms are typically most sought after. A local realtor can produce a report which shows the demand interest for each.
- Owner occupied neighborhoods. This may sound like an oxymoron, as you are buying a property to rent. Keeping in mind your exit strategy, you want to purchase a property that will mostly appeal to the end buyer.
- Before you sell check to see what requirements the retail buyers are looking for: Some low cost cosmetic upgrades such as paint, granite counter tops and new door pulls can pay huge dividends.
I could ramble on all day but I trust you get the picture. . Investing for cash flow is a short term objective and is more easily identified by doing a little diligence and computing returns. All investments should produce you decent cash flow, you do not have to settle however for just cash flow. Investing for equity growth is a long term objective and it is all about connecting the dots to identify the trends and buying habits of your anticipated buyer. Applying a little logic to insure you can sell your property to the end user who will pay a full retail price will help secure a nice equity growth position as well.