I was at a local real estate meeting this past week.
After the meeting, a local investor working to get his first deal approached me for some insight and advice, wanting a second opinion.
There are a lot of things that go into analyzing a potential deal and after that encounter this past week, I wanted to share the advice and insight I gave that investor, with you, the BiggerPockets community.
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1. It Starts With The Location
The overused but often so-true phrase in real estate is “Location, Location, Location”!
Location is not the only aspect, but especially when you’re purchasing a property that you plan to hold onto long term, it being in 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 location is right for you and your business. One strategy that I really like is creating an avatar/persona for your target tenant.
Defining your tenant avatar will help you determine things like location and funds needed for your business.
“My 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 floorplans.”
Once you have your avatar, it will now allow you to make decisions on things like location, type of house, what upgrades to make and where to advertise.
Note: This avatar is used to help you understand your potential tenants and to make better property/business decisions.
It is not to say that this is the only tenant that you will ever rent to and you cannot legally discriminate against potential tenants in protected classes.
2. Numbers Do Matter
Once you find your location and begin evaluating potential deals, it is very important to understand the numbers involved. There are 2 parts to the numbers.
1. Getting The Right Numbers
There are a lot of ways to evaluate a property to determine if it is a good deal or not. In order to use some of the calculation, you first need to make sure that 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.
2. Verifying the Numbers
The seller of a property may provide you with several or all of these numbers. It is essential that you verify each number that the seller provides you.
By doing so, you make sure that the sellers numbers are indeed accurate. Some sellers may just have outdated or incorrect numbers while others might just be trying to make the property look better than it is.
3. But Numbers Aren’t Everything
A property can appear great on a spreadsheet but there are many other factors that can either enhance or detract from the value of a property.
Below are a few of the key ones to look out for:
1. Get 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 landlords who have purchased a property where rents were well below market value.
2. Beware of Deferred Maintenance
Looking at the “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!
3. Are the Utilities Split?
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 utilities. This means that your monthly expenses will be higher (and variable based on tenant use).
It is almost always better to have separate utilities and have the tenants pay them.
4. Can Rents Be Increased?
A great way to benefit from purchased a property’s cashflow is by increasing the rents, but that only works in some situations. Rents need to be below market value and/or you may need to do 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.
5. Property Management
Either you will hire a property management company, or you will manage the property yourself. Either way, it costs money.
Even if you do it yourself, you do not work for free. The current owner may be managing the property themselves and thus might not be showing that cost.
Whether you will manage the property yourself or hire a property manager, it is important to include that expense in your calculation.
There is likely to be other criteria that you may want to consider when purchasing your first investment property beyond just the numbers on paper. Some of the key items are listed above, although it is not a comprehensive list.
Is there any other criteria that you use or that you would recommend for someone who is looking to purchase their first rental property?
Be sure to share your thoughts in the comments below!