I’m a Real Estate Investor: Here Are 8 Signs of a Great Investment Opportunity

Real estate is a popular investment opportunity — and for good reason. The housing market has seen an average return on investment (ROI) of 5.4% over the past 30 years, but the most successful real estate investors can earn extremely high ROIs.

Discover More: 3 Best States to Buy Property in the Next 5 Years, According to Experts

For You: How To Get Rich in Real Estate Starting With Just $1,000

But many factors can affect your actual ROI. This includes the property type, location, rental market conditions, your financing needs and overhead costs. With so many things to consider, it’s not always easy to find the right investment opportunity.

If you’re thinking about investing in real estate, it’s important to do your research and know what makes a property a great investment opportunity. Here are the top signs of such an opportunity, according to seasoned real estate investors Itay Simchi and Mark Poole.

Also, learn about the reasons a real estate investment might flop .

Money mistakes the super wealthy never make - that you might be doing now.

It’s in a Good Location

It’s not all about finding the right price — though that plays a key role, too. Location is key to successful real estate investing.

“Properties located in up-and-coming neighborhoods or areas with growing demand can be attractive to investors,” said Itay Simchi, the founder of Proven House Buyers . “In my experience, properties in these areas have the potential to increase in value significantly over time.”

“You want to buy property in a location that people desire to live,” added Mark Poole, real estate investing expert and founder of the online real estate publication Smarter Property Investment . “This means good schools, amenities, infrastructure and plentiful employment prospects.”

Be Aware: 7 Worst States To Buy Property in the Next 5 Years, According to Real Estate Agents

There’s High Rental Demand

If you’re flipping houses, rental demand might not be as big of a concern for you. But if you plan to earn rental income, you’ll need an area with high demand.

“A strong demand for similar rental properties in the same location that you are considering investing in is a given,” said Poole. “Without tenant demand, your investment will be loss-making. Ensure there is sufficient demand for the rental investment you are looking to buy.”

One way to do this is to check the vacancy rates in that area. Low vacancy rates tend to bring in more consistent rental income that grows over time.

The Price-to-Income Ratio Is Low

“When a property’s price is significantly lower than its potential rental income, it’s often a sign of a great investment opportunity,” said Simchi.

So, how do you go about finding out the right price-to-income ratio?

“In my experience, a 1% to 1.5% cap rate is a good starting point for determining if a property is undervalued,” said Simchi. If it is, you can generally expect higher returns on lower prices.

You Can Get It at a Discount

“You can make money immediately at the point of purchase by buying at a discount to the market value,” said Poole. “Foreclosed properties, vendors facing foreclosure, couples divorcing and vacant properties often suggest a vendor willing to take a discount to get rid of what, to them, is a huge problem.”

By getting a property at a discounted price, you’re also increasing your chances to refinance your loan, so you can extract your working capital. This will make it easier to get your next investment project, and so on.

You’re Looking at Potentially High Cash Flow

As a real estate investor, you’re going to want something that has high cash flow potential. According to Simchi, this means choosing a property with high rental income and low overall operating expenses.

Research the local real estate market to determine how much the typical home is valued at. While you’re at it, check into rental prices on similar properties to get a better idea of how much you might be able to charge. If the numbers add up, you could be looking at a great opportunity.

There’s Room for Renovation

You don’t necessarily want something that’s falling apart, but if the price is right and the cost of renovation is manageable, you could be looking at a good investment opportunity.

“Properties with potential for renovation or redevelopment can offer significant upside potential,” said Simchi. “Properties that can be renovated or redeveloped can increase in value by 10% to 20% or more.”

“You can force the appreciation of a property by undertaking work that maximizes the value,” added Poole. “This might be a remodeling, a loft conversion, an extension… The increased value gives you the opportunity to refinance post works and extract your working capital to go again.”

The Area Shows Long-Term Growth

Again, location is key. But in this case, it might be more about choosing a place that’s seen great strides in improving and developing over one that’s already reached the peak of economic prosperity.

“If you invest in an up and coming area, you may benefit from above average capital growth, which is where the real wealth is to be had,” said Poole. “Look for areas with incoming investment, improving transport links, new employers coming in and the tell-tale sign of trendy new bars and cafes springing up in what was otherwise a dull neighborhood!”

You’ve Chosen the Worst House on the Best Street

Investing in property in a good neighborhood might mean higher upfront expenses, but it can be worth it if you expect great returns.

“The worst house [on] the best street: An old adage that still rings true!” said Poole. “You are better off buying the worst house in a great location and improving it to the standards of those around it. This will maximize both your rental income and capital appreciation.”

This article originally appeared on GOBankingRates.com : I’m a Real Estate Investor: Here Are 8 Signs of a Great Investment Opportunity