How To Evaluate An Investment Property
With interest rates low, lots of properties on the market below market value, and with a strong rental market, you may thinking, is it time for me to buy an investment property? Here are my top tips for evaluating the investment potential of any property.
Our local minimum down-payment for an investment property if you’re obtaining a loan is 25%. So on a $400,000 purchase price, that’s $100,000. My first question is this: what would that cash earn you if you left it in the bank? Today’s quote on bankrate.com for a 6-month CD -1.09%. Clearly that’s not a great return, so you may get a better return on that $100k if you invest in real estate. How do you get paid on that? Your monthly rental income.
2. Vacancy Rates and Rentability
One of the things you should find out is how quickly do similar properties rent and/or sell. Every month your unit sits vacant and unrented, is another month you’re out income. Also, how many other properties just like it are available for rent? If there are 7 others, just like it, what makes your special?
3. Cash Outlay
In addition to your down-payment and closing costs, how much money will you have to put up to get this property rented? Does it need repairs, paint, updating? How long will that take? This part you’ll calculate as a flip – if I buy this today and fix it up, will I get my cash back for the repairs if I put it back on the market to sell?
4. Rental Income vs. Costs
After you’ve figured out what your monthly expenditures will be (mortgage, taxes, condo/HOA fees if any, maintenance, insurance, etc) how much will that total be? Now compare that to average rental rates for similar properties. If your rental income potential does not AT LEAST break even, I would tell you to walk away. You’ll be losing money in perpetuity. If someone advises you that appreciation will offset your monthly losses over time, you’re getting bad advice. The whole point of a rental property is to generate income NOW for you.
How will you find a renter? Who will maintain the property and do necessary on-call repairs for tenants? I did a post on “going rogue” if you’re thinking of becoming a landlord, so I suggest you evaluate your plan of attack for keeping tenants happy.
Some other tips: if you’re looking at properties within a condo or homeowners association, make sure you know what their restrictions are, if any, on renting. If you’re buying within a community already highly populated by investors, you’re likely going to hurt the resale potential of your property as lending restrictions tighten on owner/investor ratios.
There’s a lot to consider, but if you have the right information, the decision can be clear and easy!