Smart investors know that investing in real estate is what the cool kids do. If you’re careful about the properties you buy, it can be a venture with a tremendous upside and a comparatively low downside.

First, you should know that real estate is an investment that diversifies portfolios, pays off its own debt, and produces predictable and stable cash returns, even when you’re sound asleep.

And once you generate enough profit, you can use your returns to buy more properties. In other words, your houses can buy you more houses. It’s the snowball effect of snowball effects.

However, to find success as a real estate investor, you’ll need to know how to pick the good apples from the bushel.

So, what is a good investment property?

Each real estate investor has their own definition of a good investment property. But all investors agree a good investment property is one that generates a reasonable annual cash flow that eventually meets and then exceeds invested capital within a projected time frame.

For each property you look at, take some time to assess these three things: 

Location: Basically, you want to invest in markets where people want to live to lower your vacancy rates, command higher rents, and realize greater appreciation from higher property values. Look for in-demand locales, with growing economies, improving infrastructure, and increasing access to higher education. Here’s a list of hot real estate markets to invest in.

Cash flow: Real estate investors calculate return on investment, or ROI, to determine whether properties will generate enough cash flow. Learn more about ROI and how to calculate it. Cash flow is your income after expenses, so the fewer dollars you have to pay in expenses, the more cash flow your property is generating. A good investment property should never cost you more in expenses than the cash flow it generates.

Property condition: The better a property’s condition, the less you have to pay in expenses. Try not to invest in fixer-uppers, unless the property exists in a booming market and you buy it at a below-market price, and you’re able to do most of the rehabilitation work yourself at low cost.

Where do you find good investment properties?

If you want to stay local, you can talk to a real estate agency. To find good investment properties online, we recommend the following websites:

How much profit should you make?

The answer depends on what type of investor you are and what your goals are. Most investors consider property profitable if the ROI is 10 percent or more while some consider an ROI of 20 percent or more profitable.

The bottom line

If you’re thinking about investing in real estate for the first time, start by investing in something you can reasonably manage at a low cost. Small investment properties, such as individual condos and small single-family homes, are a great starting point for building your investor confidence.

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