How do you analyze a property?

Question

Hello,

New to REI. In the “gaining knowledge”phase. Focusing on long term buy and hold strategy. How do you, those who have multiple properties, analyze a property? I know that is a broad question. But i mean you have the money, you like the market. What methods do you use to determine “yes im buying this property.”

Sam Levin · Answer

Long-term only. Until recently a person could buy a new build 4 BR townhome here with 20% down and get immediate cash flow, albeit by a thin margin. Now you need more cash down to be in the black, but who really cares about cash flow when it's the other stuff that makes you wealthy. The money they make at the same time through debt buy down, appreciation, and tax deferment into the property are the real win. Unless your working in a depressed market rents keep going up so you end up with decent cash flow after a few years. There's less/no possibility of getting rich quickly (although these last two years even stable plays like this have crushed it on appreciation) but you are getting there safely, easily, sanely, and reliably. You also never have to get your hands/clothes/car/life/wallet dirty with renovation projects.

Right up front, you have the civility and simplicity and predictable(ish) closing timing that comes with buying from a production builder, rather than trying to play musical chairs with other investors and the resale market. You get the big ticket item to depreciate, incl full depreciation of all of the new appliances etc in yr 1 assuming you know how a 'cost segregation study' is used. If not, you should google it. You get a year of full builder warranty on everything. The toilet is running? Call the warranty department, give them the tenant's contact info for access and forget about it. Most anything that will go wrong, if anything, on a brand new townhouse from a reputable builder will go at the start so you almost always get 5+ yrs of no maintenance hassles. You also get the intangible but very real advantage of dealing with tenants who can afford to be in the shiny new neighborhoods. I've managed a bunch of both types of units. Just from a prop mgt perspective alone, it's worth it to go with the premium new build.

Matthew Morrow · Answer

Hi Ryan,

Lehigh Valley native, investor and agent here.

Analyzing a property can sometimes be stressful and overwhelming.  The BP tools are wonderful to get started, and if you need help analyzing some local deals here – I would be more than happy to walk you through the process.  I host a local and virtual meet up and talk about these quite frequently.  If you are looking at any properties in particular give me a shout.  All of our investments and clients are in the Lehigh Valley. Would be glad to help you learn more.

Bruce Woodruff · Answer

I do the opposite of @Sam Levin. I buy old, very distressed properties. Only in areas where you can see the gentrification coming in < 5 years. You get more than one method to gain like this.....the profit from the fix, income during the hold period and the profit from appreciation.

It just works for me, YMMV.

Michael Kunis · Answer

Hey Ryan,

Just wanted to share my experience with deal analysis. I started by using the BP tools to get an idea of the basics, but it wasn't until I met my agent, David Ribardo, that I really got into the blood and guts of understanding deals. Beyond your factoring typical cash flow, capex, etc. I look at a few other things. First of all, Google Maps Street View. That will weed out 90% of the properties that pop up. Is it in an alleyway? Is it a street I would feel comfortable parking my car on? Next I usually look at the blocks surrounding and get a feel for the immediate neighborhood. Is there a park or school nearby? bars and restaurants? I'm out of state so I rely heavily on Street View for getting idea of the lay of the land, but if you're local go for a drive and make a not of areas you like and dislike. Physical condition depends on your business model. If you can stomach major renovation go for it. If not, pay attention to the roof, the windows, the basement and the ceilings. Those can tell you a lot. "Yes I'm buying this property" depends on a lot.

Stay conservative with your numbers and factor a good amount for reserves and maintenance for the first 90 days before things start to settle after closing. I have a property that had Section 8 tenants paying half market rent for 6 months and for 3 of those months the Section 8 portion was going to the Seller's bank account. Had I not figured that out I doubt he would have ever told me. The moral of the story is that even when you're prepared, something you didn't even think about will likely occur. Giving yourself a cushion never hurts. I'm by no means an expert. I'm just sharing my experience.

If you ever want to chat, please feel free to hit me up. I've been mostly out of the market the past year dealing with personal stuff, but trying to be more present here and always love to talk to fellow new investors.

Randy Gutierrez · Answer

Pretty broad question but I would start with the tools section on here, there is plenty of information there on how to analyze a property. If the numbers pan out then I would proceed to look for any major red flags regarding the property such as foundation, HVAC, electrical, plumbing, roofing etc. If you have anything more specific to ask I'd be happy to help.

Nicholas L. · Answer

@Ryan Friend

OK -

For 1, start with Zillow to practice, and to get comps (sold or rents), ask a realtor.

For 2... that's tougher.  Read J. Scott's book.

Ryan Friend · Answer

@Nicholas L. that is definitely helpful! Where i am still researching is 1. How to analyze the market around me 2. Determining rehab costs.

Nicholas L. · Answer

@Ryan Friend

well, it's similar to how anyone anywhere analyzes a property, but if you know a market well, you know what to look for.  for example...

-in my market, utilities in small multis often aren't split and have to be paid by the landlord.

-snow removal and groundskeeping need to be covered in the lease and/or otherwise accounted for.

then, once i've truly added up all expenses, i would want to see that the rent (based on actual comps) covers them, with allotment for debt service and margin.

make sense?

have more questions?

Bob Willis · Answer

Do you rent these at LTR, or STR (i am guessing LTR)? I have never even thought or considered new build. Can you share your strategy?

How do you analyze a property?

Most Popular Reply