The 3-Step Process to Decide: "Should I Buy This Rental?"

Sun’s up? Get the coffee going. Boot that computer up… guess it’s time to get to work!

That’s pretty much how it has been for several months now. We are so busy that we have brought on more construction crews, I have an assistant starting, and we have a number of processes in place that are starting to make our real estate business more and more efficient, and I am more and more able to leverage my time to produce more deals, tenants, or whatever it is that I’m working on.

Right now, we are making anywhere from 15-20 offers on properties a month. We aren’t getting nearly that many under contract with the market so hot right now, but we are getting quite a few. And in that process, we have to be able to quickly see if we like something, analyze the numbers for repairs, holding, etc., and determine what kind of cash flow and/or equity the deal has (for buy and hold). And then take decisive action.

Here is what our process looks like.

The Easy, 3-Step Process to Decide: “Should I Buy This Rental?”

1. Determine: Do I like it?

Seriously. If we don’t like the looks of it, the area it’s in, or the proximity to commercial/street/Mr. Fancy’s booze shop, we might pass. Do we see something in the property that might keep others from buying it, but would make great sense for us to? As in, ways we can add value by modifying a structure, renovating something, or adding an addition. Whatever it might be, can I work through it in my mind enough to want to go view that property?

The other thing we look at immediately is its approximate value, what we are guessing it will need for renovation (obviously a ball park since I am likely just looking at pictures online), and what we can rent the property for. Is there a high demand for the area? If we like the property and it passes all of those things, we add it to the list to view.

2. Completely assess the property.

I am personally, on a typical day, in 2, 3, 5, even 8-10 houses a day. It depends on what is on the market and what other properties are under renovation at the time. Either way, we are in tons of houses, and we have to have a way to get through them quickly and see what is there.

I typically write a addresses down and leave a few spaces on my notepad, and then write out the basics of everything in the property. I can’t tell you the number of times I’ve gone back 2-3 weeks later to look at my notes because the property list price was reduced, and we went back to make another offer.

It looks something like this:

Windows: $3k (10 windows)

Driveway: $6k (may need to be totally replaced… check sq ft, call Mr. Concrete dude)

Hardwood refinish: $3k

Paint interior: $2,500 (minor wood rot… a lot like 123 main street, same price)

Update Kitchen: (backsplash, counter, floor, etc.)

Whatever it is, I just write it down and ballpark my cost.

Once I’ve gotten through the entire house, I do a walk through again to make sure I didn’t miss something, walk the basement checking for cracks, movement, etc., and then walk the exterior looking at the grading, the house, the gutters, and the roof. What else am I seeing? Who else might I need to call to get a really comfortable estimate on the repairs needed?

Then I ask myself again, “Overall, do I LIKE the house?” If the answer is NO, then I simply move on.

If the answer is YES, then I do a few things.

3. Perform a cash flow/equity analysis.

I have several spreadsheets that have evolved over time that work for ME. If you are a spreadsheet person, and I bet a bunch of people reading this are, we all have the things we like and how we have them laid out. I have one partner who has a VERY different idea of how he likes things laid out than I do. I can read my entire spreadsheet in 10 seconds; it took me an hour to figure out how he was laying his out.

It’s not good or bad. It just has to work for you.

Anyway, input your numbers. Build in your costs, and then build in your cushion, holding expenses with costs of money, utilities, and taxes. Make sure you have everything in there. Check the cash flow — is it cash flow positive? Does it meet the criteria for the properties you want to hold?

If you are going for more of an equity play than a cash flow play, are you able to add value with this simple formula? ARV (after repair value) – (purchase price + rehab) = Equity. If your goal is to add $25k of equity in each deal, make sure you are checking the values and numbers. If your goal is more about cash flow, then make sure it hits that number as well.

Above all, try to keep yourself consistent with how you are looking at properties and getting the information. Once you have an interest in the properties, get it “on paper” (or in an Excel or numbers worksheet), and then determine with NON-EMOTIONAL data if the deal makes sense.

On a side, but important note: It’s so much better for you as an investor and for the future tenant to deal with ALL the issues ahead of time. Don’t wait to put the roof on, or service the HVAC, or even fix the door that isn’t working quite right. It just gets more messy, more frustrating, and a pain for both you and the tenant once the property is occupied. Deal with it, and build those things into the cost on the front end, so your phone can be as quiet as it possible can once the tenant is in place.

Great for them. Great for you.

Now let’s go buy some more houses!

What are processes you’ve put into place for buying rentals that has really worked well for you?

Be sure to leave a comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.