How to evaluate and offer on rental properties?

3 Replies

How do I know what’s a good deal and what’s not when it comes to buying a rental property?

You study your local market, learn how to assess and determine what you need to make the numbers work. There is a great deal to learn about investing in any vehicle, real estate maybe more so than any other. You must not only study real estate investing but also financing, budgeting, tenant management etc. It is often difficult and definatly a great deal of work.

This web site is a solid start point to read, study, learn.

This answer is different for everybody. You need to study like crazy and let your knowledge tell you the answer.

Cash flow.

1 - Find out what the market rents are (in the immediate area...the micro-market)
2 - subtract all your expenses/month
3 - Net cash flow should be at least <here you fill in the number that your overall plan says it needs to be>

Analyze for cash on cash return.

Take the AP plus the rehab costs plus any other costs to buy the property, and plan the entrance (purchase) strategy either using:

1 - All Cash.  This must get you all your cash back ASAP.  An all cash deal means you are behind until your accumulated cash flow equals the cash you put in.

2 - ??% down payment, and leverage the rest.  This means your accumulated cash flow should catch up to the cash you put in (DP) faster, but the loan payment will mean you have lower cash flow.  This is fine.  You have less of your own cash into it.

3 - All leveraged (or using other people's money).  This is the best.

If you are leveraging in any way, you need to include the mortgage payments in the cash flow calc.  

To set the offer, reverse engineer it, starting from the minimum CF you need:

+     Rent
-      Min Cash Flow
-      Monthly expenses
=     Maximum Mortgage Payment.  The longer the term, the lower the payment, and the higher the CF

Take that Max MP, and based on the terms available, calculate backwards into the maximum loan you will pay.  This sets your offer.  DON'T GO OVER IT FOR ANY REASON....or you'd be negotiating against yourself.  Just walk away, and onto the next deal.    

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