1) Keep your eyes wide open.
Perhaps the most important advice for buying any type of investment property is to go into the process with your most keen observational skills, and your tip-top researching prowess. Look at the well-rounded picture including financial viability, location, time involved, regional economic factors, and the local housing market. Additionally, take into consideration the personalities and dispositions of tenants, the current owner, and any vendors involved in the property and how their traits may be affecting your potential. For example, what if one of the tenants is sickly with multiple medical procedures and could possibly die in the property? What if everyone hates the current landlord? Or what if they have been absentee in their management, and the tenants are not accustomed to having engagement from their landlord? Journal any findings, and keep them in mind as you are making your buying decisions.
2) Only bite off what you can chew
You’ll be happiest with the investment that is one you have time for. How much bandwidth do you have for this extra gig? A general rule of thumb is to keep your travel distance to 2 hours or less, or further out if you have a reason to visit your target destination such as family or other business. Assess whether there are good property managers in the area you’re considering, as well as how much ongoing maintenance involvement the property will need from you. Do you enjoy the location, and the type of work that will be needed at this particular property? Or is the property manager someone you’d feel good about meeting with remotely? Detail out for yourself all the factors and tasks involved to see if any given investment matches with your personal goals and plans.
3) Evaluate its unique “upside potential” package
In order to be a good investment property, it must have upside potential of some sort. This comes in many different forms, and is slightly subjective (which we’ll cover more in future articles this year). That said, some upside potential is commonly recognized. For example, if the property has been well maintained with its structure and systems, but is cosmetically challenged, it likely could be aesthetically improved on a budget which would allow more rent to be charged than was previously. Perhaps it’s vacant with a large back yard where a permissible ADU could be built. Or, it may just be a simple matter of enhancing the exterior curb appeal to attract quality tenants. Often there is a stack of multiple ways value can be added to an investment property to make it a more profitable endeavor over time, whether through appreciation of the property, or through an increase in rents and cash flow.
4) Research any local housing market conditions
Ask your Realtor and property manager in the area you’re considering telling you what the market’s like. Get a feel for the historical housing market, as well as future projections. For example, in the San Francisco Bay Area it’s often a seller’s market with few downturns and typically homes sell in relatively short periods of time. Whereas, in some areas of the country a property can take several months to sell on average (the other end of the spectrum). Assessing your own financial situation, if you’ll need the flexibility to sell the property, this will be key information to understand. If the area is a buyer’s market, you may be able to get a tremendous deal going in, especially if it's easily rentable after you close escrow. Also, what economic factors of the region have been or could imminently affect the rents, value or salability?
5) Make sure the numbers make financial sense for your goals
Are you looking for a property that has a lot of cash flow, or would you prefer a good amount of appreciation (or a bit of each?) For example, high appreciation properties tend to be in nicer areas with less cash flow. Once you have this goal nailed down, you can hone in on areas or neighborhoods. Invest in what you know - e.g. if you grew up in an upscale community, you probably won’t be a savvy landlord in the hood no matter how much cash flow it brings you. Let’s say you choose a decently safe middle class neighborhood that you understand well. Do some research with your Realtor and property manager to compare recent CAP rates of similar investments/sales in the area. Check Craigslist and Zillow rents, as well as asking around for current rent roll analysis. That way you can know not only if your target property’s net operating income and cash on cash return works for you, but also if it’s on par for the region.
Keep educating yourself about investment property nuances, through reading and sharpening your own skills. Any property you evaluate, you can run the numbers and begin to compare investments to each other, with your own goals in consideration.
If you have any questions about property management concerns in light of your target investment, we’d be happy to discuss it with you. Give us a call at 408-982-5977 or email us at info@rezidehome.com! A member of our staff will get back to you.