Target neighborhood, analyzing market, choosing a property, making the offer

5 Replies

Hello BP Family,

I have MLS access. I'm hoping to get some feedback on the step by step method you would take as a newbie choosing a neighborhood and analyzing that market. EVERYTHING you look for.

Thanks

Deborah,

Welcome to BP! 

I am a REI buy and hold newbie, located in Atlanta, GA. I am currently in due diligence for my first by and hold property. So, my knowledge is extremely limited but I will share my strategy thus far. Keep in mind my strategy is for buy and hold, so I am looking at long run factors.

I evaluate areas with either 1.New growth that is rife with young professionals or 2. established real estate value that will likely only go up. 

from there, I will run the property though 3 filters: Cap rate, Cash on cash return, and profit margin. I learned the first two from BP, the third is a simple fraction. 

Capitation rate = (rent-(tax+insurance+HOA+vacancy(rent*.1)+repairs(rent*.055))) / Property Cost. Looking for about 7% or higher.

Cash on Cash return = Net Annual income (all expenses in cap rate, but including mortgage payment) / Down Payment. Looking for about 15% or higher

Profit Margin = Net Annual Income / Gross Annual Income. Looking for as high as possible !!!

hope this helps!

Almost forgot...I also check rentometer, rentbits and check with my real estate agent to get rental rates in the area within <.5mi of the prospective property. If a conservative estimate of the rent does not get me close to the expectations mentioned above, I move on to the next property.  Don't get attached to any one property in case the numbers let you down.

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@Deborah Hill  

To find out about an area go to IREM.org search for ARM certified property managers. Call 5 ask them what sides of the city they like/dislike and why. Ask what they see them selling for and what expenses are by category. Ask for market occupancy and rents. Ask if they know anything coming up for sale.

Paul