Real Estate Agent · Chattanooga, TN · Member since 2017 · 71 posts · 39 votes
Would love to hear from other investors. All locations welcome. Looking to better understand if there is something specific that you post the most emphasis on? Is location the most important, is it the CASH on CASH return, the monthly cashflow, or is it the depreciation?
Personally
When evaluating a potential investment property, I consider several key factors to ensure it aligns with my investment goals and offers a solid return on investment. These factors include:
#1 Location: The location of a property plays a crucial role in its investment potential. I look for properties in areas with strong economic growth, low crime rates, good school districts, proximity to amenities, and positive population trends. A desirable location often translates to higher demand and potential for appreciation.
#2 Market Analysis: Conducting a thorough market analysis helps me understand the local real estate market dynamics. I analyze historical and current market trends, supply and demand dynamics, rental rates, vacancy rates, and property appreciation rates. This analysis helps me gauge the potential for rental income and property value appreciation.
#5 Property Condition: Assessing the property's condition is vital. I consider both the property's present state and its potential after necessary repairs or renovations. Understanding the cost and feasibility of any required improvements allows me to estimate the overall investment costs accurately.
#3 Cash Flow and Cap Rate: I carefully evaluate the property's potential cash flow and cap rate. Cash flow is determined by considering factors such as rental income, expenses (including mortgage payments, property management fees, taxes, insurance, maintenance costs), and vacancy rates. The cap rate provides an indication of the property's income-producing potential relative to its purchase price.
#4 Financing Options: I explore various financing options available to me, considering factors such as interest rates, loan terms, down payment requirements, and the impact on cash flow. Understanding the financing options allows me to assess the feasibility and profitability of the investment.
#6 Exit Strategy: Having a clear exit strategy is crucial. I consider factors such as the potential for future appreciation, market conditions, and the property's potential for resale or refinancing. This ensures that I have a well-defined plan in place to optimize returns when the time comes to sell or refinance the property.
By thoroughly evaluating these factors and conducting due diligence, I can make informed investment decisions that mitigate risks and maximize the potential for long-term financial gains.
First I consider location, then structure (style of building - this is important in understanding the mechanicals, electrical, plumbing etc. - weird layouts and victorian homes converted into multi family can be a headache to deal with and can substantially increase your cap ex.), then I look at cash flow. Generally over 10% is good with minimal cash invested (just a down payment on a turnkey property or a value add where I can cash out a large chunk of my asset)
Although my experience is limited to a single multi family home property, these were the 3 factors I primarily based my decision to pursue a property on:
Return on Investment: The primary intent on purchasing my first rental property was to house hack and break even with a monthly mortgage payment. I treated each potential property as if it was going to be a future rental. This was to ensure the performance of the property on a long term basis as well. The yearly return on investment had to exceed 8% at a minimum.
Location: With the guidance of a seasoned mentor, I sought properties that I would want to purchase in the future as well. Not just as my first investment. My long term goal as an investor/landlord is to choose areas that attract the least troublesome tenants.
Risk Analysis. For each property analyzed I ran a risk analysis on the most likely problems as well. The top three problems I forecasted were vacancy, hidden maintenance issues, and property damage. Each of the three can be mitigated with proper planning. I.E. insurance, renovations, or monthly income.
First I consider location, then structure (style of building - this is important in understanding the mechanicals, electrical, plumbing etc. - weird layouts and victorian homes converted into multi family can be a headache to deal with and can substantially increase your cap ex.), then I look at cash flow. Generally over 10% is good with minimal cash invested (just a down payment on a turnkey property or a value add where I can cash out a large chunk of my asset)
Although my experience is limited to a single multi family home property, these were the 3 factors I primarily based my decision to pursue a property on:
Return on Investment: The primary intent on purchasing my first rental property was to house hack and break even with a monthly mortgage payment. I treated each potential property as if it was going to be a future rental. This was to ensure the performance of the property on a long term basis as well. The yearly return on investment had to exceed 8% at a minimum.
Location: With the guidance of a seasoned mentor, I sought properties that I would want to purchase in the future as well. Not just as my first investment. My long term goal as an investor/landlord is to choose areas that attract the least troublesome tenants.
Risk Analysis. For each property analyzed I ran a risk analysis on the most likely problems as well. The top three problems I forecasted were vacancy, hidden maintenance issues, and property damage. Each of the three can be mitigated with proper planning. I.E. insurance, renovations, or monthly income.
Thank you for your valuable insights and feedback! I greatly appreciate your experience with a multi-family property and the factors you considered. Return on Investment, location, and risk analysis are all critical factors in evaluating potential investments. I agree with your emphasis on long-term performance, attracting responsible tenants, and mitigating risks. Your insights provide valuable guidance for other investors. Thank you again for sharing your knowledge!
First I consider location, then structure (style of building - this is important in understanding the mechanicals, electrical, plumbing etc. - weird layouts and victorian homes converted into multi family can be a headache to deal with and can substantially increase your cap ex.), then I look at cash flow. Generally over 10% is good with minimal cash invested (just a down payment on a turnkey property or a value add where I can cash out a large chunk of my asset)
Thank you for your insightful feedback! I appreciate your emphasis on location, the importance of evaluating the building's structure, and the focus on achieving strong cash flow. Your points align with my own considerations when evaluating investment properties. Looking forward to further engaging with you and the community on BP. Thanks again!
First I consider location, then structure (style of building - this is important in understanding the mechanicals, electrical, plumbing etc. - weird layouts and victorian homes converted into multi family can be a headache to deal with and can substantially increase your cap ex.), then I look at cash flow. Generally over 10% is good with minimal cash invested (just a down payment on a turnkey property or a value add where I can cash out a large chunk of my asset)
Thank you for your insightful feedback! I appreciate your emphasis on location, the importance of evaluating the building's structure, and the focus on achieving strong cash flow. Your points align with my own considerations when evaluating investment properties. Looking forward to further engaging with you and the community on BP. Thanks again!
Yessir! Location, location, location! I find Having an easy cookie cutter structure makes it easier to rent out. Weird layouts, slanted ceilings are a tougher sell.
First I consider location, then structure (style of building - this is important in understanding the mechanicals, electrical, plumbing etc. - weird layouts and victorian homes converted into multi family can be a headache to deal with and can substantially increase your cap ex.), then I look at cash flow. Generally over 10% is good with minimal cash invested (just a down payment on a turnkey property or a value add where I can cash out a large chunk of my asset)
Thank you for your insightful feedback! I appreciate your emphasis on location, the importance of evaluating the building's structure, and the focus on achieving strong cash flow. Your points align with my own considerations when evaluating investment properties. Looking forward to further engaging with you and the community on BP. Thanks again!
Yessir! Location, location, location! I find Having an easy cookie cutter structure makes it easier to rent out. Weird layouts, slanted ceilings are a tougher sell.
Looking forward to connect to!
Yes if its not broken don't fix it. This strategy is proven and logistically less work. However in a niche market and a shorter term lease can provide a higher return, but its another animal entirely. Thank you so much for sharing!
The goal of real estate investing is to achieve financial independence. To do so, you need a reliable passive income. A reliable passive income requires meeting the following three requirements:
Reliable - Your income continues even in difficult economic times.
Inflation-Compensating - Rental income increases faster than inflation, compensating for rising prices.
Persistent - Your income lasts; you or your spouse won't outlive it.
The process of acquiring reliable passive income properties is a process. Much like peeling and onion, as illustrated below.
Location
Location is the most important investment decision you will make because it determines all long-term income characteristics including:
Whether rents will keep pace with inflation
How long your income stream will last
How reliable your income stream will be
How much of your rental income is lost to overhead
Whether you or the government control your property
Tenant Segment
The only way to have a reliable rental income is if your property is continuously occupied by a reliable tenant. A reliable tenant is someone who stays for many years, pays the rent on schedule, and takes care of the property. And, since you will hold the property for many years, you will need multiple reliable tenants over the years. However, reliable tenants are the exception, not the norm. The best way to always have a reliable tenant is to buy properties that attract people from a tenant segment with a high concentration of reliable tenants.
You can select a tenant segment with a high concentration of reliable tenants through property manager interviews.
Once you select a segment, the next step is to determine where and what they are renting today. Based on this, you can create a list of the segment’s housing requirements. Below is an example of what a segment housing requirements might look like.
Rent range: $1,500/Mo. to $1,850/Mo.
Type: Single-family
Configuration: 3+ bedrooms, 2+ baths, 2+ car garage, 1,200 SF to 2,100 SF
Location: North of the river and east of Line Rd.
If you choose a property that does not match all of the segment's housing requirements, you are purposely excluding that segment from renting your property.
Property
You identified the tenant segment you want to occupy your property and you know their housing requirements. To attract people from this segment, buy similar properties.
Important: Each property's characteristics only match a single segment's housing requirements. So, find a segment with the right characteristics, and then buy properties that match their housing requirements.
However, there are addition criteria the property must meet:
Short time to rent
Reasonable renovation cost and risk
Acceptable initial ROI and cash flow
Reasonable purchase price
Low maintenance cost
Acceptable area rental restrictions
Located in a thriving area with potential for future growth.
Summary
Consistently acquiring reliable passive income properties is the result of a process, not luck or the opinions of others. To acquire such properties, start with the location and then peel the onion one step at a time.
The goal of real estate investing is to achieve financial independence. To do so, you need a reliable passive income. A reliable passive income requires meeting the following three requirements:
Reliable - Your income continues even in difficult economic times.
Inflation-Compensating - Rental income increases faster than inflation, compensating for rising prices.
Persistent - Your income lasts; you or your spouse won't outlive it.
The process of acquiring reliable passive income properties is a process. Much like peeling and onion, as illustrated below.
Location
Location is the most important investment decision you will make because it determines all long-term income characteristics including:
Whether rents will keep pace with inflation
How long your income stream will last
How reliable your income stream will be
How much of your rental income is lost to overhead
Whether you or the government control your property
Tenant Segment
The only way to have a reliable rental income is if your property is continuously occupied by a reliable tenant. A reliable tenant is someone who stays for many years, pays the rent on schedule, and takes care of the property. And, since you will hold the property for many years, you will need multiple reliable tenants over the years. However, reliable tenants are the exception, not the norm. The best way to always have a reliable tenant is to buy properties that attract people from a tenant segment with a high concentration of reliable tenants.
You can select a tenant segment with a high concentration of reliable tenants through property manager interviews.
Once you select a segment, the next step is to determine where and what they are renting today. Based on this, you can create a list of the segment’s housing requirements. Below is an example of what a segment housing requirements might look like.
Rent range: $1,500/Mo. to $1,850/Mo.
Type: Single-family
Configuration: 3+ bedrooms, 2+ baths, 2+ car garage, 1,200 SF to 2,100 SF
Location: North of the river and east of Line Rd.
If you choose a property that does not match all of the segment's housing requirements, you are purposely excluding that segment from renting your property.
Property
You identified the tenant segment you want to occupy your property and you know their housing requirements. To attract people from this segment, buy similar properties.
Important: Each property's characteristics only match a single segment's housing requirements. So, find a segment with the right characteristics, and then buy properties that match their housing requirements.
However, there are addition criteria the property must meet:
Short time to rent
Reasonable renovation cost and risk
Acceptable initial ROI and cash flow
Reasonable purchase price
Low maintenance cost
Acceptable area rental restrictions
Located in a thriving area with potential for future growth.
Summary
Consistently acquiring reliable passive income properties is the result of a process, not luck or the opinions of others. To acquire such properties, start with the location and then peel the onion one step at a time.
The goal of real estate investing is to achieve financial independence. To do so, you need a reliable passive income. A reliable passive income requires meeting the following three requirements:
Reliable - Your income continues even in difficult economic times.
Inflation-Compensating - Rental income increases faster than inflation, compensating for rising prices.
Persistent - Your income lasts; you or your spouse won't outlive it.
The process of acquiring reliable passive income properties is a process. Much like peeling and onion, as illustrated below.
Location
Location is the most important investment decision you will make because it determines all long-term income characteristics including:
Whether rents will keep pace with inflation
How long your income stream will last
How reliable your income stream will be
How much of your rental income is lost to overhead
Whether you or the government control your property
Tenant Segment
The only way to have a reliable rental income is if your property is continuously occupied by a reliable tenant. A reliable tenant is someone who stays for many years, pays the rent on schedule, and takes care of the property. And, since you will hold the property for many years, you will need multiple reliable tenants over the years. However, reliable tenants are the exception, not the norm. The best way to always have a reliable tenant is to buy properties that attract people from a tenant segment with a high concentration of reliable tenants.
You can select a tenant segment with a high concentration of reliable tenants through property manager interviews.
Once you select a segment, the next step is to determine where and what they are renting today. Based on this, you can create a list of the segment’s housing requirements. Below is an example of what a segment housing requirements might look like.
Rent range: $1,500/Mo. to $1,850/Mo.
Type: Single-family
Configuration: 3+ bedrooms, 2+ baths, 2+ car garage, 1,200 SF to 2,100 SF
Location: North of the river and east of Line Rd.
If you choose a property that does not match all of the segment's housing requirements, you are purposely excluding that segment from renting your property.
Property
You identified the tenant segment you want to occupy your property and you know their housing requirements. To attract people from this segment, buy similar properties.
Important: Each property's characteristics only match a single segment's housing requirements. So, find a segment with the right characteristics, and then buy properties that match their housing requirements.
However, there are addition criteria the property must meet:
Short time to rent
Reasonable renovation cost and risk
Acceptable initial ROI and cash flow
Reasonable purchase price
Low maintenance cost
Acceptable area rental restrictions
Located in a thriving area with potential for future growth.
Summary
Consistently acquiring reliable passive income properties is the result of a process, not luck or the opinions of others. To acquire such properties, start with the location and then peel the onion one step at a time.
Eric, thank you for this! I haven't seen many people propose the strategy of targeting specific tenant segments but it makes a lot of sense. You mention that you can get the information about Tenant segments through talking to property managers- is that the strategy you're recommending?
Also, many people mention Cash Flow but it's increasingly difficult to find properties that cash flow since the interest rates are so high. In using the BP calculator, it seems a lot of properties may make positive cash flow by Year 5 or between years 5-10.
To evaluate deals, I've been looking at:
- the CoC ROI % (looking for something just below 0%, -1-3%) - 5-year annualized return (looking for at least 10%) - Cash flow by year (how many years will it take to be cash flow positive- looking for anything below 5 years)
Then I look at: - reducing the purchase price I'll offer - increasing the down payment - slightly lower interest rates (~1% to maybe account for re-fis?) - and lastly, how high I could charge for rent
Curious to hear others' thoughts. Am I approaching this correctly? For context, I am a new investor looking into the Las Vegas area, already pre-approved, but now very confused on how to strategically evaluate deals.
The goal of real estate investing is to achieve financial independence. To do so, you need a reliable passive income. A reliable passive income requires meeting the following three requirements:
Reliable - Your income continues even in difficult economic times.
Inflation-Compensating - Rental income increases faster than inflation, compensating for rising prices.
Persistent - Your income lasts; you or your spouse won't outlive it.
The process of acquiring reliable passive income properties is a process. Much like peeling and onion, as illustrated below.
Location
Location is the most important investment decision you will make because it determines all long-term income characteristics including:
Whether rents will keep pace with inflation
How long your income stream will last
How reliable your income stream will be
How much of your rental income is lost to overhead
Whether you or the government control your property
Tenant Segment
The only way to have a reliable rental income is if your property is continuously occupied by a reliable tenant. A reliable tenant is someone who stays for many years, pays the rent on schedule, and takes care of the property. And, since you will hold the property for many years, you will need multiple reliable tenants over the years. However, reliable tenants are the exception, not the norm. The best way to always have a reliable tenant is to buy properties that attract people from a tenant segment with a high concentration of reliable tenants.
You can select a tenant segment with a high concentration of reliable tenants through property manager interviews.
Once you select a segment, the next step is to determine where and what they are renting today. Based on this, you can create a list of the segment’s housing requirements. Below is an example of what a segment housing requirements might look like.
Rent range: $1,500/Mo. to $1,850/Mo.
Type: Single-family
Configuration: 3+ bedrooms, 2+ baths, 2+ car garage, 1,200 SF to 2,100 SF
Location: North of the river and east of Line Rd.
If you choose a property that does not match all of the segment's housing requirements, you are purposely excluding that segment from renting your property.
Property
You identified the tenant segment you want to occupy your property and you know their housing requirements. To attract people from this segment, buy similar properties.
Important: Each property's characteristics only match a single segment's housing requirements. So, find a segment with the right characteristics, and then buy properties that match their housing requirements.
However, there are addition criteria the property must meet:
Short time to rent
Reasonable renovation cost and risk
Acceptable initial ROI and cash flow
Reasonable purchase price
Low maintenance cost
Acceptable area rental restrictions
Located in a thriving area with potential for future growth.
Summary
Consistently acquiring reliable passive income properties is the result of a process, not luck or the opinions of others. To acquire such properties, start with the location and then peel the onion one step at a time.
Eric, thank you for this! I haven't seen many people propose the strategy of targeting specific tenant segments but it makes a lot of sense. You mention that you can get the information about Tenant segments through talking to property managers- is that the strategy you're recommending?
Also, many people mention Cash Flow but it's increasingly difficult to find properties that cash flow since the interest rates are so high. In using the BP calculator, it seems a lot of properties may make positive cash flow by Year 5 or between years 5-10.
To evaluate deals, I've been looking at:
- the CoC ROI % (looking for something just below 0%, -1-3%) - 5-year annualized return (looking for at least 10%) - Cash flow by year (how many years will it take to be cash flow positive- looking for anything below 5 years)
Then I look at: - reducing the purchase price I'll offer - increasing the down payment - slightly lower interest rates (~1% to maybe account for re-fis?) - and lastly, how high I could charge for rent
Curious to hear others' thoughts. Am I approaching this correctly? For context, I am a new investor looking into the Las Vegas area, already pre-approved, but now very confused on how to strategically evaluate deals.
You're right, finding first-year cash-flowing properties is difficult. The only way we can find cash-flowing properties is through our data mining software. This morning, there are only 22 properties in metro Las Vegas that are even worth considering. The days of cruising websites and selecting cash-flowing properties ended at around 5% interest rate.
Financing
The diagram below illustrates the typical process: you obtain pre-approval, then close with the lender.
Below illustrates the process we follow today.
As soon as we have a property under contract, we contact multiple lenders and get numbers for interest-rate buydowns, DHCR loans, etc. We then work with our client to select the best financing option.
On Return Calculations
Another consideration is that return calculations only predict how a property is likely to perform under ideal conditions on day one. You will hold the property for many years, so is important to have a longer view. Below is an example of the type of mistake you can make if you only consider the initial return.
Property A had a lower initial return, but rents kept pace with inflation. Property B started with a higher initial return, but rents did not keep pace with inflation, so the time off the treadmill is short-lived.
Rents
You do not control the rent. The market controls the rent.
Zillow, Rent-o-meter, and others calculate the average price per square foot of recent rentals for a given area and then multiply that by the square footage of the subject property. This fails almost 100% of the time.
Every property is unique and must be evaluated based on factors such as location, condition, configuration, and lot size. Online programs cannot take these variables into account. Additionally, what a similar property may have rented for in the recent past is not always a good prediction for what your property is likely to rent for today.
Property managers evaluate rental properties by comparing them to current listings in the area. By assessing the competition in relation to your property, they determine a suitable rental price. This is why we include a property manager as part of our property validation process.
On Achieving Cash Flow
The time to achieve positive cash flow is totally dependent upon the city. In some cities, where there is little demand for housing, prices are low and rents rise slowly or not at all. In such markets, it may take a long while to achieve a positive cash flow. In high-appreciation markets, one year is realistic.
Currently, we are still achieving positive cash flow in the first year. However, this requires finding the right property and the right financing.
Our Target Tenant Segment
Fifteen years ago, when I started our investor services business in Las Vegas, I interviewed many property managers to gain insight into the various tenant segments. Once I had their input, I spent approximately three months studying tenant pool demographics. I selected a narrow tenant pool segment and have been targeting them for the past 15 years.
I've also collected behavioral data on our tenant segment over the years and this is part of the input to our data mining software. We have about 10 years of data down to the street level in many areas of Las Vegas.
How Long Will High Rates Last?
“Predicting anything beyond yesterday is guessing.” …Eric
I've asked that question of many of our clients. Generally, the guess is between two and three years. I do not believe that interest rates will go back to 2% or 3% in the foreseeable future. I do believe that we will see 4% and 5% interest rates in the next two or three years.
