When I talk to people interested in real estate investing, there is one question that comes up over and over again:
“Damien, How do I find properties? How do I access these super secret deals?”
Ask 5 people, get 8 answers. Active investors rely on connections, marketing, and firms who can find them enough properties to act on. Some people drive around neighborhoods. Others send out direct mailings.
My Answer: Zillow.com
If you are a busy professional, like me, looking to add real estate to your portfolio, you can keep it simple. You just need a good property, at a good price, in a good neighborhood. Your needs are close to a person looking for a personal home, so why not use the tools made for them.
How to find investment properties using Zillow?
What we’ll walkthrough today?
- What is Zillow?
- What makes a good property on Zillow?
- How do I find houses on Zillow that would make a good investment?
- What do I do next?
What is Zillow?
Zillow is website & app designed to help people look for homes (purchase or rent) and connect with realtors. Their great innovation (and why I use them) is “Zestimates”. Zestimates are Zillow’s estimation of a houses value and expected rent. The site is free and monetizes from advertising fees to realtors.
Zillow doesn’t use MLS (the official real estate database) data. This can cause issues in homes being sold already, numbers being off, or data coming in a few days late, but usually is OK. Because of this (and 300 other reasons) remember
You should do more research than just Zillow before buying a property!
If you are just starting out, you will want to understand more than what Zillow offers. Validate the numbers using comparable rentals and recently sold houses. But, Zillow surfing helps you understand neighborhoods and narrow down to properties worth researching.
What makes a good property on Zillow?
I’m going to use Atlanta, GA (Georgia) for today’s example. I like Atlanta. I used to live there, they have good barbecue. But, I haven’t researched here before. So, like many of you, today I’m starting from scratch.
If you type in a city on the homepage, you are suddenly presented with thousands of homes.
3,993 houses were shown for Atlanta … damn.
Let’s make this number manageable so we can start looking at actual houses.
Important Rule of Thumb: Try and find properties where rent is 2x the mortgage & interest payments; or where rent is >1-2% of the property value.
Generally, if you hold true to these rules of thumb, it is significantly harder to lose money. SIGNIFICANTLY!
Many first time investors are caught off guard by repair, maintenance, and vacancy costs. Many think if they buy a house with a $1,000 mortgage, but can rent it for $1,300, they will easily make $300 a month.
Costs add up quickly. A new HVAC system can set you back $1,800. That’s 6 months of profit. Don’t forget insurance (~$75 a month), a month of vacancy ($1,000, or 3 months of profits), and new paint ($2,000 every 5 years). And of course … taxes!
But, if you’re paying $1,000 a month and expecting $2,000 a month in rent, that’s a hell of a cushion to feel good about.
Bad News: This means you may need to look outside your hometown.
Expensive cities like New York, Washington D.C., and San Francisco make it hard to find properties that work. But, Baltimore MD (45 minutes north of DC), New Jersey (nearby to NYC), and Oakland, Sacramento, and Richmond (bordering cities to SF) can give you great opportunities. Personally, I manage properties in Maryland living in California, so long-distance ownership is very very doable.
Setting some search criteria
I am not an active real estate investor. I have a full-time job, and can’t spend 8 weeks rehabing a place myself. I want to buy something that will rent at a profit and won’t cause me a lot of trouble. Let’s assume I have $30,000 to invest. That includes a down payment, any repairs, and closing costs.
If I pay 20% down on the house, then the max I can afford is $150,000. Since I want room for closing costs and repairs, I want to stay under $100,000. A $20,000 down payment and $10,000 for repairs and closing.
3 bedroom houses are recommended, but I’ve done well with 2 bedrooms too. We want a good neighborhood and no major repairs. Single family homes would be great, but a spacious condo or townhouse with reasonable HOA fees will work just fine (I have 2 condos).
The idea here is to get a home a family will want to stay in forever. 1 bedrooms and 2 bedrooms cater to more transients, increasing vacancy and turnovers. The right family will love your home like their own for a decade if all goes well.
This translates to the following criteria.
- House under $100,000
- Rents of $1,000
- 3 bedrooms (2 bedrooms OK)
- Good neighborhood
Great, let’s go looking in Atlanta!
How do I find houses on Zillow that would make a good investment?
Now that we know what we are looking for, let’s whittle down these 3,993 homes in Atlanta.
First thing, Zillow wants to give you all kinds of homes, including ones that aren’t actually for sale. We just want properties that are available for sale right now.
Next to the location search box is the first filter, “Listing Type”. Uncheck any potential listings, for rent, or recently sold, like the picture. Leave the “By Agent”, “By Owner” and “Foreclosures” boxes under “For Sale” checked.
Next, we don’t want anything above $150k, so let’s put in a max price of $150,000. Down to 730 homes. Better, but still too many to go through.
So, let’s start with 3 bedrooms. I want something a family will move into and stay for years. Down to 366.
Now, I’ll just focus on houses and townhomes. Condos are cool, but have higher turnover than homes and higher HOA fees. Plus, I still need to cut more homes.
I’m looking for a family home, so let’s say minimum 2 bathrooms and at least 1,200 square feet. GREAT, we have 128 homes. Depending on your city, you may be running out of homes. Try increasing you price or using less quare feet, or going to 2 bedrooms. Or … invest in Atlanta 🙂
My results are spread out and I don’t know enough about Atlanta to pick a good area. I remember I liked my old neighborhood (Midtown, near Georgia Tech), but it looks like nothing there meets my criteria. Where should I look?
Now I head over to Trulia Crime Data (Trulia is owned by Zillow) to look at crime data. I know crime alone doesn’t define a good neighborhood, but it’ll give me a place to start. Trulia kind of hides this on their site, so just Google “Trulia Crime Data <insert city>” to get there quick. This picture is good Ol’ Atlanta Ga.
I notice an area where I see homes that seems to be mainly green. Maybe thats a place to check out? I literally just eyeball the maps and pick an area to try out.
Back in Zillow, I draw on the map to focus in the area that looks good to me. There is an Arrow & Circle icon on the right side of the map screen. Select this to draw on the map.
I’m down to 32 homes that match my criteria. Now, let’s see if anything is interesting.
Let’s sort the houses by the cheapest and start looking around.
I don’t want a lot of work, so I’ll avoid foreclosures for now and anything that looks dilapidated. I just want to find a good deal because I’ve got a good budget to work with. I’m looking for “House For Sale” and good pictures. First couple of homes aren’t looking good … FML.
This home looks interesting. Let’s look into it by clicking the picture, and hitting “expand” in the top right corner. Here’s a link to the exact property.
First thing I want to know is how much it will rent for. I don’t care how nice of a house it is and how cheap $75,000 is (to anyone living in the Bay Area that is). If it won’t rent for enough money, it’s a waste of time.
For this, I scroll down to the “Zestimate Details”. I get an estimate of the homes value and the rent. My 1% rule is satisfied here. $1,095 is more than $750 (1% of $75k). I don’t like that the estimated home value is 25k less than the asking price. I’ll need to research that before putting in an offer.
Now, let’s look at the mortgage and costs. Scroll down further for the “Mortgages” section. Make sure to hit “Include taxes/ins”, because you want to understand all your costs. You can play around with interest rates, expected insurance costs, and taxes. If you don’t know them, just stick with the defaults.
I’m happy to see the rent, at $1,095, will be more than double my mortgage, insurance, and taxes.
Now I’m looking at pictures. I want to get a feel for updates of repairs I’ll need to make.
Front looks just OK, but needs some cosmetic touches. Brick front is nice and a driveway. But no garage, just a carport and the lawn is a mess.
This is pretty nice. Kitchen has been updated. Not high end features, but it’s clean and doesn’t need work. I’m hoping the fridge is out of sight and not missing.
Nice bathroom! Doesn’t look like it needs any work and is updated.
I’m guessing this person wasn’t very mobile. This messy backyard and frontyard compared to the inside makes me think they neglected the exterior. I mean, what is all that trash?
Overall, this isn’t bad. Looks like a few cosmetic changes to get this house read. It’s under my budget, so I can do some repairs. There is more I want to know, but there is hope in this area.
What do I do next?
Do the math
Let’s take a look at the fundamentals
Estimated Down payment: $15,000 (20% x $75,000)
Estimated Mortgage, Taxes, Insurance: $420
Estimated Rental Income: $1,100
Estimated Repairs: $5,000
Estimated Closing Costs: $2,250 (3% or $75k)
Total Upfront: $22,250
Potential Cash Flow before expenses: $680
On paper, this looks great. But remember expenses. Expenses come in the form of property management fees (~7-10% of rent), vacancy (~5% a year), and repairs (~150 a month or $1800 a year). Understanding and managing these are very important, but giving yourself a cushion to start will give you breathing room to handle them. You also have $7,750 in extra money to pay the mortgage while it gets rented or other things.
But, remember to add in the fact someone is paying your mortgage. If you make 0$ after costs, you still own a home outright after 30 years with no mortgage. You may also be able to increase the value with improvements to the home (imagine a jacuzzi tub or garage).
Do more research
Zillow estimates are great to start, but do the work to make sure they are right. Look for what similar houses rent for (Zillow rental search, Realtor.com, or Craigslist). Look for what comparables are selling for (Redfine, Zillow, Trulia, Realtor.com). Make sure the numbers in your math are right.
Learn more about the neighborhood. Is everyone moving away? Is there a new shopping center that will drive up home values? Is the city seeing strong population growth? Feel good about the home you are buying … even if you won’t live there.
Make an offer
Buying a home in the US still sucks, but start by finding a realtor. Zillow will recommend you realtors, and Redfin is another option, since they employ their own realtors. I’ll detail this more in the future.
Get it rented
Unless you have the time and energy to self manage, find trustworthy property manager and use them. They can help get the house ready, get it listed, screen tenants, and collect rent. If you are like me and have more money than time, it is worth it.
I hope this was helpful and demystifies one of the burning questions about real estate investment.
Have you looked for properties before? Any tips or tricks you’ve picked up? More questions? Leave a comment.