Do you know what to look for in investment properties?
Updated: Mar 1, 2021
What you’re looking for in a property depends on how you want to do business. Do you want to “Flip & Sell” or “Buy & Hold”? This decision will depend on your desired outcome. Are you in it for the long haul with less risk or are you a one-off?
If you’re looking to “Flip & Sell”, you will want to buy low to make the most money possible - quickly. That means hiring teams of professionals to do the construction or working on it yourself relentlessly. If you’re looking to do the work yourself - stick with something easier. Today’s residential buyer wants everything perfect and they’re willing to pay you for it. Look for a property with good bones and a great layout that only needs a “facelift” vs an in-depth heavy renovation (Structural Changes, Re-zoning, Code Upgrade, etc)
If you’re looking for something that will be a gradual build, look for a property with at least 3% cash on cash (CoC) return and in the right neighborhood. Many investors look for 5% but that just isn’t realistic in an “easy” investment. Harder to Sell neighborhoods will usually offer higher return (ex Bridgeport @ 9-10% vs Greenwich @ 3%-5%). This desire for a higher return is dependent on:
Neighborhood/Proximity to desired attractions such as transportation
Condition of the Property (potential or necessary capital improvements)
Ability to Raise Rents
Ability to rent consistently without vacancies (Vacancy Rates)
Ability/Ease to Sell for Profit
Mortgage’s Effect on this Return (Cap Rate/Cash-on-Cash Return/Cash Flow)
Long-Term Upside - Low rents in a desirable neighborhood are like blue-chip stocks. Guaranteed to go up! Look for long-term upside counts even when the cap rate is low.
Analyzing property can be tricky.
Most investors will use a combination of IRV Relationship (Investment/Rate/Value), Cap Rate, and Rent Multiplier to get the best picture of the property's worth.
The paperwork needed to properly analyze an investment property includes:
Income and Expense Report
Copies of bills
Plot Plans/GIF Maps
Rent Roll with Lease dates
Zoning/ Rent Control Laws
Comp reports of other similar properties for lease and sale.
Pro Forma - If rents are much lower than market value you can show the potential of a property by analyzing using potential rents.
Calculations used in Investment Real Estate:
GOI - Gross Operating Income - the total sum of all income (rents)
NOI - Net Operating Income - GOI minus all Expenses
GRM - Gross Rent Multiplier - is an important metric because it is the first clue on whether or not your property is an income producer and to see if the current asking price fits the general market. May also be seen as Gross Income Multiplier (GIM) to include money from laundry, parking, etc.
Equation - $2,000,000 Property value (asking price) / $200,000 Gross Rental Income = 10 (Referred to as 10X RENT) The GRM for a property like this is 10x.
CAP RATE - Ratio of Net Operating Income (NOI) to the property asset value.
Equation - Sale Price = $1,000,000, NOI = $100,000, then the cap rate would be $100,000/$1,000,000, or 10% NOI/Sale Price = Cape Rate
Cash On Cash Return - When investing, it's important to think about how much cash to put down on a property because it will determine how much cash we get in return for the cash we put down. This concept is called cash-on-cash return (CoC).
Equation - $20,000 Net Operating Income (NOI) / $400,000 in cash we put down =
5% Cash On Cash return.