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When searching for their next treasure, real estate investors can easily become assailed with advertisements for high-end properties while overlooking a mine full of opportunities and hidden gems that are not always observable.
Relatively high rental rates, placement in posh neighborhoods and proximity to the finest restaurants are atypical of the Class A/B properties that can reel in an investor hook, line and sinker. Costs to maintain these luxuries and hang on to high-quality tenants, however, quickly shear down the profit margin. Class C properties, on the other hand, found in somewhat rougher, neglected areas, can be much more lucrative, especially after making some initial investments for refinement.
With the right guidance, veering toward Class C properties in lower-income areas is a great way for an investor to find their next diamond in the rough.
Find The Right Deal
Each investor needs to understand what the right deal looks like to them. Some investors may be looking for value-add opportunities, while others want to increase short-term cash flow or long-term equity. Understanding the objective will help garner your search.
Provide this information to your personal network of brokers and other real estate professionals. Leverage these business relationships to help you get more eyes searching the market. Be sure to provide them with clear parameters on the deal you are targeting.
Use online search tools such as Craigslist and Loopnet to find budget-priced properties with a lot of potential. Pay special attention to listings that have been removed; the seller may have pulled a listing after being unsuccessful and will therefore be in a suitable position to bargain.
Lastly, take advantage of the research that has already been done for you. Learn where online crowdfunding and investing platforms are placing their current deals, and follow their leads. These companies need to do a ton of market research before investing in a particular area and encouraging others to invest with them.
Research The Potential For Success
Before purchasing any property, investors should learn about any growth the neighborhood is expected to undergo over the next four to five years. Is there sufficient transportation to facilitate that growth? Are there schools and shopping areas nearby?
There are also a few specifics to watch out for based on property type:
• With multifamily properties and hotels, avoid the risk of vacancy by ensuring the surrounding area has a sufficient residential and tourist population.
• When buying single-family residential homes, assess the potential for mortgage helpers, such as basement suites or new additions.
• Investors looking to purchase abandoned spaces should target lower-income neighborhoods to leverage the country’s new Opportunity Zone program, intent on spurring economic growth in these areas.
Create A Win-Win
Once the jewel has been spotted, it needs to be acquired. If there is room for negotiation, start preparing. Find out more about the seller’s financial position and key motivations to help develop a proposal that’s enticing to both parties.
The first step in creating a win-win situation is to be sure you’re dealing with the right person. It is always safest to go through the real estate broker from a legal standpoint; however, seasoned investors, especially those with experience buying Class C properties, may find it more effective to negotiate directly with the seller.
The next step is to enter the negotiation armed with meaningful data. The information age has created a paradigm shift in the way negotiations are handled. Nowadays, everyone has access to the same data, evening the edge between buyer and seller. Both parties must be convinced their problem will be solved by completing the deal.
Lastly, while doing research, prepare a strong leverage point, and stick with it during the negotiation. For example, ask the seller to consider how long they may need to wait until the property appreciates before they get their initial asking price, how much business they can lose in the meantime and where the bank stands on lending to other investors who want to buy Class C properties. Use the facts to help them understand why their potential jackpot might be sitting right across from them, on the other side of the negotiating table.
Convert The Asset To Optimal Use
Once the asset is acquired, you have yourself a raw diamond, ready for refinement. The conversion process, however, varies for each property type.
With multifamily properties and hotels, the priority is to get rooms in service. The status of the rooms should be assessed immediately, especially for potential health and safety hazards, to help plan a budget and timeline for capital investments.
In single-family residential areas, it is important to maintain the trends and quality of life being seen throughout the neighborhood. Ensure the property’s interior and exterior design elements align with those undercurrents.
Abandoned spaces, such as warehouses, must be girded to create business revenue as soon as possible. Research what services are required by local or adjacent communities, as well as the legal requirements for zoning.
I believe that the right amount of research, initial investment and out-of-the-box thinking will allow most Class C investments to flourish, more so than their Class A/B counterparts. Following these basic guidelines will go a long way for any investor whose goal is to create passive or active rental income. And if the process of searching for and manufacturing your property becomes laborious, simply outsource these services to seasoned investors who have mastered the art of finding and refining these hidden gems to splendor.