DIY- Analyzing Real Estate Deals

 

As Sales Manager at Real Property Management, I speak daily with homeowners, investors, toe-dippers and more often than not prospectors showing up in covered wagons looking at potential real estate deals in one or more of the markets Real Property Management has offices,  including  (Cincinnati, Columbus, Dayton and Louisville) I always make a point to emphasize the importance of location and advise that they personally visit, research and walk the neighborhoods before making a purchase, as there are a lot of items that go into analyzing a potential real estate deal, like the famous one liner from Edith Bunker…

location, location, location.

I know, the overused phrase  “Location, Location, Location” was stolen from Edith,  it’s not the only aspect when you’re purchasing  property that you plan to hold long term, the right location is very important. Not only does the location have to financially make sense, it also has to attract the right type of tenants. There are a lot of factors that play into what locations are right for you and your business.

One strategy is creating an avatar/persona for your target rent amount. Defining your tenant avatar will help determine things like location and funds needed for the investment.  Perhaps your ideal tenant is a young professional between the ages of 21-35.  They have a college education and prefer modern and trendy design.  They typically want to have laundry on site and prefer open floor plans.

Once you have your avatar, it will allow you to make decisions on things like location, type of housing, what upgrades to make and where to advertise. (This avatar is only used to help you understand your potential tenants and to make better property/business decisions.) Remember It’s not to say that this is the only tenant that you will ever rent to, as a well-qualified tenant is better than an unqualified tenant, and of course we all know you cannot legally discriminate against potential tenants in protected classes.

Numbers matter. Once you find your location and begin evaluating potential deals, it is very important to understand the numbers involved.  There are a lot of ways to evaluate a potential investment to determine if it is a good deal or not.  In order to use some of the calculation, you first need to make sure you ask for the right information.

Understanding what formulas/calculations you want to use will help you determine what information you need.  Some examples include taxes, utility bills (if you will be responsible for them), current rents (and market rents) and vacancy rates. The seller of a property may provide you with several or all of these numbers.  It is crucial that you verify each number that the seller provides you and never “assume” they are correct. By doing so, you make sure that the sellers numbers are indeed accurate.  Some sellers may just have outdated or incorrect numbers while others are just trying to make the property appear as a better investment than it really is.

A property can appear great on a spreadsheet or in conversation, but there are many other factors that can either enhance or detract from the value of a property. Here are a few of the key ones to ask the current owner for.

-Copies of all current leases. When you purchase a property, you will inherit the tenant and whatever leases that they have in place and you’ll have to honor those prior agreements.  I know many landlords who purchased  property where rents were well below market value. If the owner doesn’t have leases, ask for rent receipts or a copy of tax returns.

-Deferred Maintenance. Looking at “as-is” numbers, everything may look good but if there is deferred maintenance (ex. roof needs to be replaced), those renovation costs can quickly turn what appears to be a good deal into a bad deal. Even if the deferred maintenance is made up of a bunch of small items, it could very easily end up developing into a deal breaker, so be careful!

-Utilities. If you are purchasing a multi-unit property and the utilities are not split, that more than likely means that the owner is paying for ALL utilities.  This means that your monthly expenses will be much higher (and variable based on tenant use). It’s almost always better to have separate utilities and have the tenants pay them.

-Rents. A great way to benefit from a property’s cash flow is by increasing rents, but that only works in certain situations.  Rents that are below market value and/or the property may need some renovations to be able to increase the rents. Also, rents can only be increased if you are not inheriting a lease/contract between the tenant and the previous owner.

-Property Management- You will need to hire a property manager if you want to remain hands free. The current owner may be managing the property themselves and not showing the true cost on paper, usually because they don’t keep track. If you decide to manage the property yourself, understand you are taking on, at minimum a part time job, with the potential to go full time.  Don’t you already have another job down at the quarry?  Whether you manage the property yourself or hire a licensed, professional property manager like Real Property Management, it’s important to include the expense in your calculations. If you’ve not researched the cost, contact [email protected]  for a quote and free consultation.

Conclusion

Real Property Management is an affordable option, I’m always happy to show the benefits.  There are likely many other factors that you may want/need to consider when purchasing your first investment property beyond just the numbers.  What criteria or advice would you recommend for someone who is looking to purchase their first rental property?

Real Property Management is the nation’s leading property manager. For over 30 years, Real Property Management has developed intelligent solutions for thousands of individual property owners, investors, tenants and Realtors.

What can RPM do for you?

 

 

Matt’s an Ohio licensed Realtor with 20+ years experience in residential and investment real estate sales, leasing, property management, and offering pre-purchase consultations and BPO’s for investors and lending institutions. Matt currently works as the Sales Manger at Real Property Management. You can contact Matt at 866.500.6200, via email ([email protected]) or DM on twitter @CincySalesGuy

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