(Photo: Mark Moz)
In our previous post on the real estate investment purchase process, we walked you through the 3 first vital steps you should follow when starting out on the investment property hunt. You’ve been educated in real estate investing, formed an initial team to help you find and analyze that investment property, and you’ve been out looking at properties.
“I’m ready to go, what’s next?” – Anxious Acquirer
It’s Time to Run…The Numbers!
Don’t go scurrying away from your real estate deal yet. You are so close now and some solid data will really help you with your decision. Running the numbers is the most important part of the investment purchase process. This is often an overlooked step when a typical homebuyer makes the leap to a real estate investor. Unlike a primary residence, an investment property needs to cash flow and needs to be evaluated as such. The color of the drapes, the next door neighbors, and the amount of white tail deer feasting on your tomato plants does not matter near as much in the long run. Real estate investing is a business and requires cold, hard facts to help make your business decisions.
“Hold on a minute, how do I know what my potential property rents for?” – Harried Househunter
This can be a difficult first step: here are four ways you could check. We also wrote a blog about this called “How Much Rent Do I Charge?”
1) Look at “For Rent” signs nearby in your target neighborhood and see if suggested rents are displayed. The owner may be too high/too low so take this with a grain of salt, but you may find a common theme with rent prices.
2) Talk to your property manager or real estate agent (you do have your team together by now, right?) They will both have intimate knowledge of the market and neighborhood. The property manager sets rents for many properties in your city and knows what the market will bear.
3) Ask the seller or seller’s real estate agent if they have any rent data. The unit could have been rented before, or they may know of similar properties in the neighborhood that have been rented. Condos can be analyzed fairly easily since someone is probably renting one in the same building.
4) Check Craigslist and “for rent” classifieds. Get details on the properties online and see what similar properties are advertising for.
Hint: When we go live with our software here at AssetRover, you can check out our rent estimates given for properties directly from the MLS. The algorithms and investment tools we’re developing will also give you a Comparative Market Analysis (CMA) while calculating your NOI and cash flow based on those estimates. These automated tools don’t require tedious manual entry into spreadsheets, making it easy to evaluate your potential deals in a snap! Find that positive cash flowing real estate with AssetRover.
Now that you’ve looked at properties for a while and have been running the numbers, chances are that you’re feeling more comfortable. Congrats! You might have even found some good deals where the numbers work, the neighborhood is growing and desirable, and rental properties are in demand.
At this stage, you’ll want to take a critical look at your financial situation and what finances you have available. There are a number of ways to finance a property. If you have some cash saved up for a down payment and want to take the traditional route through a bank, treat this the same way you would secure financing for your own home.
Some rules on financing for your own dwelling vs. a rental property can vary, especially when you are dealing with condos. Banks will have their own rules and concerns about condos, and investment properties in general, but Fannie Mae is the governing body that sets the direction for all of them. The Federal National Mortgage Asociation (FNMA), better known as Fannie Mae, backs most home mortgages in the U.S. After the mortgage crisis, ol’ Fannie has tightened up quite a bit. Homeowners’ Associations in areas like Miami really had difficulties when swathes of owners walked away from their mortgages and foreclosed. HOA dues were way overdue and if the people were having troubles paying their mortgages, you know they certainly weren’t paying the HOA fees.
Fannie Mae feels that if too many properties in an association are rented out as investments, it will increase their risk. Due to this, there are a number of Fannie Mae rules for investment condos. Sanda O’Brien’s post does a great job in outlining these rules.
Problems like this after the housing meltdown made condos a lot tougher to finance but not impossible. Take this into consideration when looking for your ideal investment property and talk with your lender to look at options. Due to Fannie Mae rules and HOA concerns, there is a lot of debate if a condo is really a good investment property or not. This really deserves it’s own blog post, stay tuned!
A single family home purchase is the alternative to a condo, but each has its own set of pros and cons. In the mean time, research online and do your homework to decide which type of property you’d rather invest in. Our investment property listings at AssetRover will show both condos and single family homes to help you decide what is best for you.
Zero in on a Property
Since you’ve researched your neighborhood ahead of time and found out kind of financing you can work with, it’s time to really get going with the property hunt.
There is a guideline called the 100/10/3 rule. The rule is broken down as follows: run numbers and research 100 investment properties, find 10 that meet your criteria and go look at them. From there, find three suitable properties and make offers on them (one at a time please, you don’t want to end up owning all 3!) Or, maybe you do. Maybe you have cash to burn and they accepted your aggressive offers. Just keep in mind that an offer requires earnest money and is an intent to buy. If the seller accepts your offer, you’ll be going into escrow and you’ll be a proud (or frightened) owner soon.
One rule we like to follow is the 100/10/3 rule. What does this mean? Here we go:
100 – The number of properties that you need to look at, online through AssetRover’s investment property search and calculators or through your Realtor®)
10 – The number of properties (out of your 100) you pursue in more detail (i.e. physically looking at, running more in depth calculations, etc.)
3 – The number of properties (out of your 10) you aggressively make an offer on. These three should be good enough that you wouldn’t mind owning all three of them. This doesn’t necessarily mean you have to purchase and make offers on all three of them through, unless you have the means to. Make offers one at a time until you get the deal that satisfies your cash flow goals.
There you have it! Now you can get out there and find yourself a property to make an offer on. Once our alpha release of AssetRover comes out, finding your next investment will be even easier.
Check out our next post on the investment purchase process, called “How to make your real estate offer stand out” where we dig into the offer making and negotiation stage, what you do when an offer is accepted, and how you mitigate your risk and make sure you are buying the right property.
Before you leave:
Don't forget to check out our free rental property calculator. This will be a valuable tool in your arsenal as you analyze your existing or potential rental properties.
- Free version available.
- We'll calculate your offer price based on your desired cash flow or cap rate.
- See future property projections based on the economic outlook including:
- Enter your dwelling value and get your depreciation schedule.
- Analyze your profits after sale based on using a Realtor or not.
- Pick and choose from 12 different data elements (ex. annual income, expenses, cash flow...) to dynamically display your data on an interactive graph.
- Check out the useful links to help you evaluate your investment.
Thank you for your ongoing support and happy investing!
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The information presented does not consider your particular investment objectives or financial situation and does not make personalized recommendations. This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, AssetRover recommends consultation with a qualified tax advisor, CPA, Financial Planner or Investment Manager.