Great, you finally made the decision to become a real estate investor and to purchase an income property or else you are a real estate agent and ultimately decided that you need to service investment property. Whatever your objective, kudos to you for understanding how real estate investing can benefit you.
Okay, now that you are actually face-to-face with your first investment property, you need to evaluate whether it’s profitable enough for you to pursue a purchase or just a waste of your time and effort to further consider the property as an investment. Here are some suggestions to help you get started before you submit an offer to purchase.
1) Evaluate the price. Review the APOD or other marketing data you were presented paying close attention to the property’s cap rate. Cap rate (or capitalization rate) is one of the most common returns used by tax assessors, appraisers, and real estate professionals to evaluate rental property price and is a good way to make a quick determination whether the property appears priced to sell or not. If you’re working with a real estate professional than he or she can point it out for you and most likely can tell you how the property compares to the local market. There’s more you’ll consider later, but for now you simply want to get an immediate idea whether you really want to pursue a purchase, so look to the cap rate. Here’s the formula in case you’re not familiar with it: Net Operating Income divided by Sale Price equals Capitalization Rate.
2) Evaluate the property configuration. You want to know what the mix of the units are (i.e., studio, one bedroom, two bedroom, three bedroom, and with how many bathrooms)? Is the parking open, and if so, is it covered (with carports) or not covered, are garages provided for each unit, and if so, is there ample parking for additional tenant parking? How about storage, does the complex offer extra storage units for the tenants? You get the idea. You want to know whether the investment has the potential to lure tenants and if so, does it provide room to sustain or increase the income?
3) Compare the property to other comparable properties that sold recently. If you’re working with a real estate professional have him or her run you a “comp” (or comparable market report). This will show you the price that rental properties similar to one you want to invest in have recent sold. In this case, look more at the price per unit than cap rate because the income and expenses reported in most listings might not be accurate enough to rely on a computation of the capitalization rate.
4) Evaluate the property location. You want to know whether or not the complex is located in a good rental area with high occupancy able to support market rents and low turnovers. Drive around the area making notes. Does it have easy access and is it close to shopping, bus lines and schools? How much competition do you face? Look for rent signs, if you don’t see them (and you probably won’t) then jot down the telephone numbers of the property management companies and ask them about their vacancies. The bottom line is this: Do you feel okay with where the property you are about to invest in is located?
5) Evaluate the overall condition of the property. Drive by the property and make notes with close attention to the roof, siding, windows, parking area, and grounds. Don’t be timid. If you spot anything that might cause you to offer less than the seller’s asking price, let it be known. If your concerns are reasonable and you have a seller willing to listen, great, otherwise walk away. The last thing you want to do is to invest your hard-earned cash into a money pit.