Real estate investing starts with researching properties in a market you are interested in. Your ability to research investment properties will directly affect your success with real estate investing. Having a strong research process will allow you to find properties that fit your investment goals and enhance your chance of success. If you’d like to learn more about that than read on.
Fortunately, it’s not rocket science, once you understand the financial metrics you are looking for, you’re pretty close to being able to buy. Your only limitations at that point are essentially the negotiations with the buyer and the home inspection. Let’s walk through the process and give you some useful tools that we’ve used to make this process as smooth as possible. With our spreadsheet you will quickly be able to narrow down properties to ones that will make good rentals.
Before we get to that, here are some common terms it helps to understand.
All The Terms You Need to Know
Note
A true rental property is valued based on cash flow. Determining the price on cash flow will give you a solid reference point on what you should be paying regardless if you are buying the house from a retail seller or from another investor. These numbers will be available to you if buying from another investor. If buying from a regular homeowner we will show you how to estimate these in the next section
Out of all these metrics, cap rate is probably the most important. Cap rate will allow you to compare the price of your property to similar properties in an area and see if the price you are paying is reasonable. For example, if most properties in your area have a 10% cap rate and the seller is asking for a price that gives you a 5% cap rate, you are probably overpaying. It also helps you evaluate multiple rental properties and see which would be the best investment (typically the one with the highest cap rate).
We’ll show you how to analyze and property and a new tool called RoofStock that will make this process a lot easier. To analyze properties, we will be using our spreadsheet that you can download below.
Money Gouge Tip: Create an Outline before you go Online
Similar to buying any other home you will want to create an outline of what you want before you start looking. Some things to outline are single or multi family and location. Price is important as is the amount you have for a down payment.
How to Analyze any Property
We’ll use a property in Arnold, MD
Zillow will help us populate many of the values that we need. Within 20 minutes we can get a good idea of whether this would be a worthwhile rental property. Without even contacting a realtor we know it currently rents for $1900 because that’s what it sold for on Zillow. You can also use Zillow to cross compare this home with rentals in the same area.
Money Gouge Tip
Comparing similar properties for rent in the area is a great way to get a feel for your potential rent. I do not recommend using Zillow’s estimated rent value. I have never found it to be accurate. A better calculator is rentometer. Their estimate for this property is $1950. Between that and looking on Zillow you should have a safe estimate. Confirm your potential rent with your realtor when you have moved forward with the process.
There are only two rentals in the nearby area so not much competition. It also appears that rent is slightly higher than what the place is rented at. In addition, the 3/3.5 floorplan we’re considering will easily be able to compete with these other listings
Putting it All Together
Looking at the previous data point let’s assume it will rent for about $2100 and that we will have one month of lost rent due to finding a tenant. So we’ll estimate that to be conservative.
Note
Express the estimated vacancy as either the credit loss or % occupancy. I entered both here so you can see the equivalent way to express them but if you don’t zero one out it will count it twice.
Now, we populate the expenses part of the spreadsheet with data from Zillow. Almost everything is readily available from the website. For property manager costs assume 10% of rent, that is the standard.
For an estimate of the mortgage there are a ton of estimators available but we used this one. For rates I generally refer to whatever bank you use daily. Obviously this can differ from your actual lender or rates but is a solid estimate for this part of the process.
I have found the most accurate way to estimate homeowners insurance is to get a quote from your current provider. There are estimators online but they can be way off. Getting a quote does not affect your current insurance and is not binding in any way. I consistently find that Geico has the best prices for rental properties and is super easy to run a quote through. I use them for my properties and estimated $900 for insurance for this property by running a quick quote.
Note
Set property taxes and insurance to zero on the mortgage estimate if you are going to account for them in the expenses section of the spreadsheet. Conversely, set the expenses to zero on the spreadsheet if they are part of your mortgage estimate. This will avoid counting them twice.
From a quick preliminary analysis we can see that if we purchase the home for $310,000 with a 20% down payment we can expect to make about $132/ month after mortgages and other expenses. This is expressed by the $1588 cash flow after taxes value. Keep in mind, you will also be getting an increase in equity every month from the mortgage payments being covered by rent.
In about 20 minutes you can get a good idea of how a property will perform as a rental. This particular property is in a nice school district and expensive area so you can expect that it will cost more and have a lower cap rate. Searching in a cheaper area will likely yield higher cash flow relative to cost but will change the dynamics of your tenants and neighborhood.
Money Gouge Tip: Avoid The Big Three
As you can start to see with this analysis, not all costs are going to affect your investment the same. There are three costs that are paid annually and have a major effect on your monthly cash flow. They are insurance, property taxes and HOA fees. A large increase in any of these will quickly turn a property from positive to negative monthly cash flow. Out of all three, HOA fees are the one you have most control over. It depends on the area, but in Arnold, MD many other comparable neighborhoods have an HOA fee of $250/month. This would take cash flow from around $113/ month to requiring $118/ month to break even
Researching a Rental Property with Roofstock
If you’re considering a rental property in the future it makes sense to consider RoofStock. They offer professionally vetted rental properties across the whole country. The best part is their listing contains all the same stats that we just analyzed for as well as an extensive home inspection. Let’s say you wanted to buy an investment property that is about the same price range as the Arnold, MD home. Here is one on RoofStock from Columbia, SC.
Note that all the relevant information is presented to you. We can instantly see cap rate and other key metrics. These are calculated by the website based on the current rental numbers so there is no estimation or filling out a spreadsheet. You can edit the details in the financials tab for estimated mortgage cost, etc. This property has about the same cap rate and with a 20% down payment would make about $566 in cashflow annually. Many properties on their marketplace are much higher but I chose this one because it has a similar profile. Importantly, the cashflow estimate assumes a 5% vacancy.
Here’s where it gets fun, note that the property is already rented. If you find a property with over 12 months left on the lease (which there are plenty of) or your tenants renew, then your cashflow will be higher because you have zero vacancy. The cashflow predicted by Roofstock factors in a 5% vacancy so you are likely to exceed this number. Meanwhile….
Our first property would be guaranteed to have at least one month of not being rented. Why is this? It’s because you will need to put the house up for rent after buying it. Even if you find tenants in the first month, the property management company will take the first month’s rent as the fee for finding a tenant. Since this property is already rented, you are simply taking control of an already rented property with no gap in rental income. RoofStock mitigates the major risk of not finding tenants right away.
Because you already have the stats available to you, you can take the time to look through the 60 page property inspection and see if this property’s condition is acceptable to you. With a typical investment property you would need to pay around $150 to schedule this.
You can quickly ascertain every single detail you would need to buy the property. That’s why RoofStock is the bees knees. I enjoy looking at rental properties and have bought two on my own before I knew about them. After going through the process multiple times I fully plan on using them for my next property I am currently saving for. To me, it simply does not make sense to try and put the picture together on my own when a professional is offering the same information to me for no cost.
RoofStock
An free online market place to buy and sell rental properties. They have turned thousands of prospective real estate investors into landlords making passive income. Their professional, data-driven approach gives you everything you need without having to go through the homebuying process.
Regardless of how you choose to start your journey in real estate, there are opportunities everywhere. These simple yet powerful processes will make the difference between purchasing a wealth building investment and a money pit you can’t get rid of. It will also save you time as you can quickly focus on properties that fit your investing goals such as cash flow or equity building.
What questions do you have about real estate? We’re here for you.