Saturday, November 20, 2010

4 Things You Must Know When Buying Arizona Investment Property

Payam Raouf
Associate Broker
Arizona Property Management and Investments
www.azezrentals.com
888-777-6664

Even in a real estate market where you can acquire property at huge discounts, you still need to do your homework! What you know, or don't know, will impact the outcome of the investment. For example if you purchase a property in the wrong area of town or inaccurately calculate the rental market, then you may significantly hinder the growth of your investment. The proper research will allow you to minimize risk. Take the guesswork out of your decision to invest in real estate. This article will not necessarily tell you exactly which Arizona investment property to purchase; however will highlight 4 key components that should be researched when making the buying decision. You will also be provided with a few tools that will aid you in your analysis.

Location
The first component of buying an Arizona investment property is to determine the best location. How would you know this, unless you are actively working in or studying the Arizona real estate market? Just because you can pick up a single family home for $40,000 doesn't mean it is the greatest deal out there. There is a lot of money flowing into the Arizona market from investors located in other parts of the country, as well as other parts of the world. Many of these investors are purchasing property because it is cheap, not necessarily because it is in the best location.

The September 2010: Repeat Sales Index Report, published monthly by Arizona State University's W.P. Carey School of Business, provides detailed information on the state of the Arizona real estate market. This report highlights changes in housing prices by location, which is a great indicator for potential investors.

June 2009 - June 2010 Changes in Housing Prices by Region

Central +5.8%

Northeast -5.1%

Southeast -1.3%

Northwest +1.8%

Southwest +4.2%

Based on the data above, it would appear that homes located in the Central region (Phoenix) have outperformed other areas of the Valley. Some of the other indicators used in determining the best Arizona investment property location are foreclosure rates, median home prices, and pending home sales.

Property Type
The second component of buying an Arizona investment property is to determine property type. Whether it is a single family, townhome, condominium, or multi-family, you need to make sure the property fits in with your overall investment strategy. If you are looking to buy and hold for cash flow, then you are looking for the property that can yield the highest monthly rent (a duplex or tri-plex over a condominium or townhome). If you are looking for a fix and flip property, then a single family home with the most resale potential may be the best option. Once again, this article is not looking at what you should do, but to explain that there is a difference in property type based on your investment expectations.

Let's look at the investment strategy of purchasing a cash flow property. Obviously the goal is to acquire a property at the lowest cost possible producing the highest possible rate of return. The comparison below will show the potential impact that a certain property type could have on your cash flow strategy.

Condominium vs. Duplex Example

Condo

Purchase Price - $50,000

Monthly Rent - $650

Monthly Expense - $270

Monthly Cash Flow - $380

ROI - 9.12%

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Duplex

Purchase Price - $100,000

Monthly Rent - $1,150

Monthly Expense - $270

Monthly Cash Flow - $880

ROI - 10.56%

Based on the above example even though the condominium is half the cost of the duplex, it yields a smaller Return on Investment (ROI). It is important that you factor in the monthly expenses associated with each property type. This particular condo had a $200 monthly homeowner association due (common on condominiums and townhomes), which lowered our monthly cash flow.

Market Value
The third component of purchasing a profitable Arizona investment property is accurately determining the market value. This is a MUST and to ensure the best information it is recommended that you contact a real estate professional. If you are not sure who to contact in the Arizona market, feel free to contact Payam Raouf at Arizona Property Management and Investments for a recommendation.

This section is not a guide to completing your own market valuation; however will provide you some tools to do your own due diligence and to be knowledgeable of the assessment process. There are many websites (Zillow.com, Cyberhomes.com, etc.) that will run an automated valuation for a specific property. In determining the actual value, these should only be used to give you a ball park and do not always take into account all factors that could impact what the property is really worth.

How is a property's value determined? This is not an exact science, but more of an educated opinion. The true value of a property is what someone is willing to pay for it. Whether it is an appraiser or other real estate professional, the market value is determined by analyzing comparable home sales in the subject property's locale. Some comparable factors include; age, lot size, square footage, number of bedrooms and bathrooms, and amenities (pool, upgrades, etc.).

At the end of the day, the market value will have a direct impact on what you will pay for a property. If the value is miscalculated, then you may find yourself overpaying for a property. This could result in a hit to your expected profit.

Rental Market

The fourth component that should be researched before purchasing Arizona investment property is the rental market. Whether your intention is to buy and hold or to fix and flip, it is important to know the strength of the local rental market. For those investors looking for a cash flow investment, the rate of return is largely dependant on this component. How much can you charge for rent in this area? How quickly are properties being rented out? For those primarily looking for a short term fix and flip investment, do not overlook this component. What happens if you are not able to sell your property as quickly as you had intended? This is your exit strategy.

There are 2 main factors to research when studying the Arizona rental market, monthly rents charged and vacancy rates. You may notice significant differences in these factors from one location to another. For example, the Department of Housing and Urban Development's 2011 Estimated Rent Report shows the estimated monthly rent for a 3 Bedroom Property in Phoenix with a 85021 zip code is $1,220 whereas the estimated monthly rent for a 3 Bedroom Property (also in Phoenix) with a 85022 zip code is $1,440. These estimates may have a large impact on where an investor purchases their property.

There are a many resources available to you with information on the Arizona rental market. However as with determining the market value, it is important to consult with a real estate professional or property management company. If you are not sure who to contact in the Arizona real estate market, please feel free to contact Payam Raouf at Arizona Property Management and Investments to get a recommendation.

It is a great time to purchase Arizona investment property; however it is important to do your homework. Now that you are familiar with the key components to purchasing a successful investment, it is time to do your research. Learn how Arizona Investment Property by Arizona Property Management and Investments can assist you in that research.