Now we've come to the exciting part, right? Right! Finding the right properties to invest in is obviously at the heart of long-term and sustained guaranteed success in real estate investing. It's the area that will tap all of your knowledge and creativity, and where over time you'll build experience and expertise. You'll come to rely on this time and time again. Finding the right properties is equal parts knowledge and your ability to creatively "see" a property's potential. In short, here's where we marry your brain with your intuition to achieve a complete solution (wholeness).
First, let's review property types and property classes.
The three types of buildings I'd like to focus on in this chapter are as follows: Residential. Users live in one to four units. Can be various types, such as single family, duplex (two units), triplex (three units), and fourplex (four units). Commercial. Five or more business units, such as an office building or a strip mall.
Mixed Use. A single building with both residential (people live there) and commercial (businesses) options.
If you are just starting out investing in real estate, I suggest that you begin by purchasing a two-or four-unit property. This way, you can begin small, leverage your way into a property, learn all you can, and then move up to a larger property when you have experience and a positive cash flow.
There are four classes of properties:
Class A. A property less than ten years old, in excellent condition, and with desired amenities, such as a pool or workout center. Class A properties can ask for, and receive, high rents, generally have a better quality of tenants, usually have lower maintenance costs, and are easier to manage. These properties are usually held by (owned by) investor groups and have a lower rate of return. They are the most sensitive to any downturn in the local or national economy. Class B. Buildings that are ten to twenty years old and in fairly good overall condition. Class B properties are considered the most stable of the different property classes, and are usually located in well-established, middle-income neighborhoods. They are new enough to offer amenities, yet still old enough to be affordable to the average investor and tenants.
Class C. Buildings between twenty and thirty years old with limited or nonexistent amenities. Both ongoing and long-term maintenance costs are higher because of aging and the general need for a cosmetic "facelift." They have a lower quality of tenants, including those on government assistance. Value can be added by updating the property.
Class D. Buildings more than thirty years old that need substantial capital improvements. Usually located in declining areas, Class D properties usually have substantial deferred maintenance issues, such as the need to replace the roof, the electrical system, the HVAC system, etc.
TIW For beginning investors, I suggest that you focus most of your attention on finding undervalued Class C buildings.
You can look for undervalued properties in any of the four classes. However, please note that for Class A properties, the velocity of your money—the amount flowing to you—will slow down simply because there is less upside potential. For beginning investors, I suggest that you focus most of your attention on finding undervalued Class C buildings.
Starting Your Search
Here are the steps I recommend to find undervalued properties.
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