Remember playing this game as a kid? You got to advance on Green Light but the leader made you stop dead in your tracks? Every potential investment property has its obvious pros and cons and also subtle factors to either give you pause or keep you confidently moving forward on the purchase. Here’s a sampling as food for thought:
Red Light
- The current owners want way more than the property is worth.
- There is an insurmountable backlog of deferred maintenance of the property (money pit!)
- The market rents don’t exceed nor support your all-in cost, operating expenses, property taxes, and debt service. (i.e. no way to break even, cash flow, or have a return on your investment).
- The area’s demand for rental properties is low.
Yellow Light
- Hidden handshake deals between tenants and landlord, and among tenants themselves.
- Problem tenants that may need to be evicted.
- Strained relationship between current tenants and landlord.
- Sluggish real estate sales market in the target area.
- Rents are low compared to the area.
- Understanding any “grandfathered” zoning or permits that could affect your plans for the property, as well as any current possible litigation.
- Owner has not kept records of repairs and upgrades (or won’t provide them).
Green Light
- The investment property is in a neighborhood or area you understand well.
- Market rents are being collected, or the property is vacant and easily rentable.
- The lot is sub-dividable and zoned for higher density than current use, providing future flexibility.
- The property has potential for one or more permissible ADU or JADU.
- Upside potential is easily identifiable.
- The results of a thorough financial analysis (CAP rate, GRM, NOI, ROI/ Cash-on-Cash Return) positively matches with your goals.
As this list is in no way conclusive, feel free to add more of your own criteria to this Red light/Green light list. And then, when you’ve come up with as many factors as possible, you may also want to ask yourself some all-inclusive questions. Would you want to live there? Would you move your family into this property? Your answer may be the most telling insight of all.
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.