We take a lot of steps when finding properties to invest in because we want to be able to reduce our overall risk when investing. The steps that you take before making an investment can mean the difference between long-term success or quickly losing your money.
While there are a lot of steps that we take when finding properties to invest in, the most common steps are:
1. Analyze the Property and Its History
The property needs to be in good condition, unless there has been some capital set aside for updating, and it should have a good history. If we’re purchasing a multi-family home that has a history of being a rental, we’ll do our best to look at the property’s:
- Vacancy rate
- Rental income
- Average returns
- Average tenancy
It’s not uncommon to find rental properties with a lot of upside and a great history being sold by someone looking to sell off their assets to return. We do all of the research to find out if the property has performed well in the past or if similar properties in the area are offering high returns.
2. Look at the Underwriting
Underwriting seems like a term associated only with loans, but in this case, it’s looking at the underlying figures, including:
- Cap rate
- Price per unit
- Vacancy rate
- Capital expenses
- Gross rent multiplier
- Management costs
When you look at the underlying figures, you’ll have a better understanding of how the property is performing and can perform for you.
3. Check Job Market
Local job markets, infrastructure and major employers will help bring steady tenants to a property. If the location is losing businesses that are moving away for a variety of reasons, it may be a good indicator that the location is going downhill.
View job market reports in the area and be weary of properties that are in areas that are losing jobs.
4. Research Crime Rates and School District
If the jobs market is doing good, you’ll want to learn more about your specific area. You may have a property that is in a crime-riddled area that won’t be able to rent out for the high rents that are being paid just a few minutes down the road.
You’ll also want to research the local school district.
Tenants that have children want their children to go to a good school district and will happily pay higher rental prices, too.
5. Identify Other Key Indicators of a Strong Investment
We also like to look at additional indicators that include but are not limited to:
- Infrastructure and investment in the area
- Tax incentives that may be offered
- Businesses moving to the area
- City growth in the last 5 years
- City’s plan to promote growth in the next five years
It’s important to spend as much time as possible researching a property, neighborhood and surrounding area before making an investment. You should never skip these steps no matter how much a rental property seems like a deal.
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