How to evaluate potential investment properties

12 Replies

Hi,

I am new to real estate investment. I have looked at different townhouses for the past few weeks (in Maryland). There are three potential properties I am interested in, but I am not sure what is the best way to evaluate them. They all have similar size, but option #1 is very close to subway (for people commuting to Washington DC), highway and major shopping centers, listing price $415K, built in 1986, the realtor said similar property in the community rented for $2300/month. Option #2 is brand new home, $385K, but far away from subway, about 3 miles from highway, similar new home in that community rents for $2200/month. Option #3 is close to highway, major shopping centers, about 3 miles from subway, listing price $329K, built in 1989, similar home rents for $1800/month. If I buy a brand new home, it would be minimum maintenance cost for many years, but the location is not as good as the home built in 1980's and need more maintenance. Any suggestions on how to evaluate them for investment? Thank you.

Amber

Hi @Amber Huang have you run the numbers through a spreadsheet or something like BP's Rental Property calculator?

Right now I can't remember which BP book/blog post/podcast to point you to regarding how to analyze a deal, but beyond price and rent you have to factor in taxes, HOA fees, insurance, vacancy rates, and property management fees (even if you are planning to diy it). There is a section in the forums about analyzing deals, try there.

Hi Amber,

There are a number of different ways I would evaluate these investment properties as potential buy and holds.  First, I would not just take my agent's word on what these properties would rent for and instead would do some additional due diligence to establish the potential rental price of each one.  Try rent estimator websites like Zilpy and/or get confirmation of the rental prices from an independent source.  

Second, don't just evaluate a potential investment property based on the cashflow, but also think about the long term price appreciation potential.  Generally speaking, a home close to the DC Metro system would be more attractive to me (and also probably easier to rent out) because it will have more appreciation potential.  

Finally, as another responder has said, plug in the numbers for these deals into one of the rental calculators available for free on this website.  

Also, how familiar are you with the neighborhoods where these homes are located?  Make sure you understand things like crime rates, etc in each neighborhood since they will impact the rentability, quality of tenant, etc.  

-Rob

Thanks to everyone for your great advice and reference links. I got the interest rate from a lender and home insurance estimate. After I plugged the numbers in, I was very surprised to see that the house actually has negative cash flow. I never thought the operating expenses would be that high. The question is where I should look for investment property in Montgomery County. The housing price here is already high. Should I look elsewhere, like Frederick or Prince Georges County? Thank you.

Amber, A good rule of thumb, which BP talks of often, is the 1/2% rule. If the property will rent for at least 1% (preferably 2%+, but not always possible in some markets) of the sale value, then it's worth doing a more thorough analysis. 

In the case of the properties you mentioned, all of them rent for far less than 1% of the sale price, so my opinion is to keep searching. 

@Amber Huang

Good question- There are markets in the DC area that will cash flow, but they are harder to find and are usually farther out. 

I scrape the MLS and do a lot of analysis of properties daily for my clients... and based on my research, Southern MD, portions of Baltimore, and other exurbs (Northern MD around Hagerstown) Southern VA around Fredericksburg and Winchester can all have properties that will cash flow. Eastern Shore MD sometimes has them too. Most don't though- you have to look a lot to find them and many need work.

Overall the Baltimore/ Washington market doesn't have returns as high as what you'll find in some of the rust belt cities and other places in the US. Returns in cities like Buffalo and Detroit can be MUCH higher, but these also don't have the same levels of appreciation we've generally experienced in the past.   Every market has its good points and bad ones I think. We're more stable/appreciating but that also means less returns for rental properties. 

If you'd like to see a map of where I've found properties in the past, I'd be happy to show you, it's pretty cool. Feel free to send me a message. 

Liz

Yeah I was going to say that none of those properties make much sense but it seems like that's already been discovered.

I'm only here because one of my tagged keywords got hit -- Fredericksburg. I invest in Stafford and Fredericksburg, VA because you can find decent cash flow here. My strategy is the BRRRR strategy -- you should definitely look into it. It basically stands for Buy Rehab Rent Refinance Repeat. You need to focus on getting distressed properties at a discount, then rehabbing them. That is the best way by far to get a property to cash flow. Plus, if you have instant equity, you can pull it back out with a cash out refi in 6 months.

If you're more fond of Maryland, I hear that Baltimore is a great cash flowing city too, but I don't have any experience there.

@Amber Huang

Going to have to agree with the crowd.  I actually have a rental similar to Option 1, but that was purchased as a primary residence and not as an investment.  

It works well how I have it set up, but I would never buy it as an investor.  Feel free to PM me if you want some specifics on how it operates.  

I'm personally investing closer to Baltimore, but I have other reasons to be in that market also.