Buy & Hold 101: The 3 Levels of Researching a Rental
Lucky #7 is in the house! To date, we’ve brought you 6 awesome Buy & Hold blog posts detailing everything from finding good property managers to owning cash flow real estate. Our most recent post was all about asset protection, so make sure you check that one out.
We’re one more post away from wrapping up our Buy & Hold series, but today it’s all about researching rentals when you buy and hold.
And the key to rental research is a 3-level system that is sure to simplify and direct your processes with targeted, thoughtful research that will produce profitable properties.
3 Levels to Rental Research Success
Level 1 – Preliminary Online
It all starts with online research. If you’ve got a potential deal on your rental property, you’re going to need to do some preliminary recon, which can be done from the comfort of your cushy couch.
When it comes to market research, we’re talking:
- Population growth
- Job growth
- Median household income
- City development
- Traffic congestion
Your research should also uncover typical house size for your area. Find out how many bedrooms, typical square footage. Be on the lookout in your neighborhoods for red flags like high unemployment rates and major industry relocations.
Consider investing in community development as well. Check out community redevelopment office websites in your area, and find out what areas are home to organizations like Habitat for Humanity. Find out if any areas of interest are considered “low-income” or if they’re slated for redevelopment.
This, my friends, if your sweet spot. This is where you’re going to find properties with major rehab potential that you can ultimately flip as rentals. You’re also going to get your greatest appreciation in these areas as home ownership grows.
In short, know what’s up... Know your neighborhood, understand the demographics and do as much research as possible.
Level 2 – Boots on the Ground
We transition from online to on the ground in Level 2. I’m talking about pounding the pavement. It doesn’t matter if you’re in New York and your property is in Texas. You need to get your feet on the ground and your eyes on the property – one way or another – and inspect it with your own eyes both day and night.
Believe it or not, properties can take on an entirely different look and feel in the dark, so again, be sure to check it out both day and night. But I highly recommend staying in your car for the nighttime drive-by. (Hopefully, that’s common sense for multiple reasons, right.)
Now, take it one step further and talk to the neighbors. Your goal is to get a feel – not just a visual – of the area. Properties can look great on paper, but experiencing them in person can make a world of difference.
Level 3 – Work the Numbers
So you’ve done your online research, and you’ve investigated your property AND it’s neighborhood up close and personal. Now it’s time for some serious deal analyzation.
And guess what? The numbers don't lie.
In Level 3, you’re going to break down your property's potential revenues and deduct the expenses. Revenues minus expenses... so what does that leave you? The actual profit, which, after all, is your bottom line.
Now let’s talk about the seller’s asking price.
Listen to me now, hear me now… The seller’s asking price is irrelevant to you. That’s right. No matter what your seller is asking for the property, it's irrelevant to you as the investor.
You run the numbers that produce the returns you want, and that’s what dictates your offer. Period.
I like to work backwards. I visit Craigslist or Rentals.com, and then I work backwards to verify expenses. Most of the time, I get an estimate. Your seller will give you the expenses, but you need to verify them.
Typical expenses include utilities, and in multi-family properties, for example, utilities can be half and half. Know how the utilities break down – from maintenance to financing costs and taxes. Remember, people often forget to calculate their taxes monthly, so you’ll need to do your homework.
Be liberal with your estimates and aim high to ensure you’re covered when all is said and done.
Now let’s talk about NOI – net operating income, which is basically income minus expenses. Your goal is to nail down net operating income. That’s your potential profit, so the larger the number, the better.
You’ll need to know your cash flow, which is simply net operating income minus any debt servicing. In multi-family units, you're going to have what's called your gross rent multiplier, which is an old school way to value property. It doesn't account for debt servicing; it’s simply your sales price divided by your multi-gross incomes.
Most investors will want to know your cap rate, which is your net operating income divided by the property price. Cap rate enables us to compare potential deals side by side to truly understand what the REAL returns will be.
Final Food for Thought
When you make this type of investment, whether for yourself or on behalf of a partner, keep a close eye on cash. Keep the question, “What's my cash on cash return?” forefront in your brain, and understand what your true ROI is.
Remember, do the research, pound the pavement and work the numbers. This should make researching your rental painless, and in the end (fingers and toes crossed) highly profitable.
Thanks for hanging with me, and stay tuned for the final post in my Buy & Hold series – Lessons from the School of Hard Knocks. It’s gonna be one killer blog post, so don’t miss it!
Until then, stay classy and keep on keepin’ on!
Got any Qs or Comments?
Hit me up in the comments section below.