A good real estate deal goes beyond the listed purchase price and considers all the factors that play into the potential cash flow of an investment property. Investors, landlords, and property managers will learn what experienced investors evaluate to determine the value of a potential real estate investment.
Determining the value of a real estate investment goes beyond the calculations in a rent cap analysis. You need to take a broad look at all the factors that will play into owning a positive cash flow rental property. In this video, real estate expert and investor, Kaycee Miller, shares the key items in a potential rental property that determine if it will be a good real estate deal.
Is this Real Estate Investment a Good Deal? – Video Transcript
One of your goals in real estate might be growing your portfolio – whether that means adding more doors to your portfolio or making improvements to your assets’ value.
Regardless of your goal, when it comes to growing your portfolio, there should always be one question on your mind when evaluating properties: Is there going to be a good return on this investment?
My name is Kaycee Miller, I work with Rentec Direct property management software. I am also a landlord, a real estate investor, and I have been in the industry for over a decade writing about nearly every single property management topic imaginable.
Whether you’re new to investing, you already manage rental properties, or maybe you’re a property manager or a real estate agent, and you’re advising clients on whether or not a property is going to be a good deal, here are some things that I like to think about during that initial rei evaluation.
Will this real estate investment be profitable?
I’ve already talked about the 1% rule in real estate investing. The 1% rule is that initial glance at a property, when you evaluate the listed real estate purchase price and the potential rental income that property could generate. For example, with the 1% rule, if a property is listed at $200,000 for sale, will I be able to collect $2,000/mth in rent to cover that expense?
I always do a mental 1% rule evaluation when I first consider the potential profit on a rental property purchase. If I am super interested in the property, or I see a lot of income potential, I’ll do a further rental analysis (even if the property doesn’t pass my initial 1% rule test).
But what else are we looking at besides the purchase price?
Beyond the 1% Rule in Real Estate
In this video, I’m going to go over some other things I consider to determine whether or not a property is going to be a good investment and potentially generate a positive return, and be a good addition to my real estate portfolio.
So, let’s think about what it takes when I do initial evaluations of a real estate property to determine if I should move forward with investing. Here’s some of the things I like to look consider when determining if a real estate investment will be a good deal:
- Property age
- Maintenance
- Purchase price
- Market rent
- Neighborhood
- Income potential
Rental Property Investing – Property Age
When considering a property’s age, we follow a standard rule – if the property is more than 50 years old, we usually don’t even consider evaluating it.
This has to do with some of the building materials that were used in older construction, think lead-based paint or other chemicals that were used in historic building construction. Toxic chemicals make any maintenance on the property a little more expensive.
We once were renovating a home that was built in 1920 and there was some damage done to the walls by the previous tenant. And when we said, “Hey, can you just replace the sheetrock on this wall?”
They found that there’s actually asbestos in some of the building materials. So instead of this project being a simple wall replacement, they had to tent the entire house, hire a team that would actually go in and remove the asbestos from the entire property in order to then redo that one wall.
So that’s one of the things that can happen when you think of a property that could be older, might require more maintenance, or have materials that you just don’t wanna be dealing with.
Rental Property Investing – Maintenance
Another factor when considering age is what other kind of maintenance are you going to require on that property?
Not only maintaining the building, but are they going to be needing appliances sooner? Are the sewer systems ones that you wanna provide maintenance on?
It makes me think of one property that we have where the numbers were really, really attractive. It was going to be such a great deal! We couldn’t pass up the opportunity even after doing some initial improvements to make it turnkey-ready.
But, because of its age and the lack of routine maintenance from the previous owners, it has caused us a lot of ongoing maintenance issues. We have had to replace floors, replace bathrooms, deal with water damage, septic issues, and plumbing, all sorts of stuff. And although the numbers still pencil out to be very positive income wise, the amount of overhead it takes on our end, I would almost think of it as not my favorite investment that we’ve made.
Rental Property Investing – Purchase Price
We will always consider the initial investment and the purchase price of a rental property when evaluating its return. It will always come down to how much is that purchase price and that will determine a little bit more of the return on the investment.
Rental Property Investing – Market Rent
A good investment will generate a return only if the property can sustain or maintain the area’s market rent.
You must find out what the average rent is for the area where the property is located and whether or not the property can realistically rent for that amount.
In some communities, you can charge premium rents, while in other communities, you cannot charge more than that average market rent.
It’s important to consider that average market rent for your area and how that factors into the purchase price and what the return is going to be for you.
Rental Property Investing – The Neighborhood
And thinking about that area, what is the neighborhood actually like?
Is this a neighborhood where you’ll be able to attract tenants that you feel like will maintain the property, pay their rent on time, be amicable to work with, and report maintenance issues?
Is it a property that is in a neighborhood with neighbors who want to also maintain their properties to help with attracting qualified tenants?
Are there other areas in the neighborhood that make it desirable? For example, is it near public transit? Is it walkable restaurants, other schools?
The location of the property and it’s surrounding neighborhood can make the property really attractive. Location is so important, that the term walkability has been added to real estate listings.
Maybe there’s a really good deal somewhere, but it’s right next to a railroad. Is that good because it’s quick access to transportation. Or is it actually a negative because you’re going to be dealing with railway noise, and it might actually be harder to rent?
Rental Property Investing – Income Potential
When evaluating a rental property investment, I also like to think about the income potential of that property.
Income potential goes beyond collecting rent, and the potential growth of market rent. There are other ways that you can generate rental income.
Maybe it’s by a dog park, so attracting renters that have pets, then you can charge a pet fee on top of your standard monthly rent.
Are there areas of improvement that might not cost very much or you could do within the next five to 10 years that can increase your income potential?
Maybe you can collaborate with local parking structures or your city to offer some sort of parking discount. I guess I’m thinking about if it’s located in a downtown area, can you work with your city to get a discounted parking pass, and then you can provide that pass to your tenants and maybe charge an administration fee on top of that as a potential rental income generator for you.
Factors to Consider When Purchasing a Rental Property
So, there are just some factors that are interesting to think about when it comes to evaluating a rental property.
It’s not always about that 1% rule or a traditional rent cap analysis. You want to consider all the following factors: age, maintenance, cost, market rent, neighborhood, and additional income potential.
Additionally, I think it’s important to think about opportunity cost when evaluating a real estate deal. How much energy and time is it going to take for me to manage this property or to even communicate with a property manager about potential maintenance that it could have? And then how much will this property generate over time? I’m talking about those income potential options that we discussed.
So, there’s lots that can come into evaluating a rental property. Price is one factor, but I like to think about all the big picture when I’m getting closer and closer to thinking about a property and saying like, yes, let’s get further and see if this is something we want to add to our portfolio.
I’d love to hear about what else you think about when it comes to evaluating a property. Make sure to leave us a note in the comments.
As always, you can follow me on the Rentec Direct Blog. I’m Kaycee Miller with Rentec Direct. Come and visit me there and check out more videos to come.