Factors/data in evaluating an income property. Share your approach!

[Edita D.]

Hey guys!
I think there is more to take into consideration when evaluating a potential income property than just cashflow, cash on cash return and cap rate. What factors/data you also take into consideration?
I pay attention to:

-employment growth in the area
-market trends
-population growth
-closeness to shopping mall/hospital/university/another big employer of the area
-average DOM (days on market before the property gets rented)
-unit mix in that area, demographics and psychographics
-appreciation of middle-class neighborhood

To do this analysis, I utilize real estate agent's knowledge of neighborhood, and the following websites:

-city-data.com
-neighborhoodscout.com
-realtor.com
-trulia.com
-mapquest.com
-US census bureau and bureau of labor statistics.

Please, share your parameters and websites you utilize... Or maybe you think the most important thing is cash flow, cash on cash return and cap rate?
Thank you!
Edita :)

[Frank Gallinelli]

I may be showing my age here, but do you remember a tv commercial for beer back in the '70s where Yankees owner George Steinbrenner is arguing with some guys about whether Miller Lite is "Less filling" vs "Tastes Great?" Manager Billy Martin pipes in with, "I feel very strongly both ways."

As do I about your question here. I agree completely that all of the items you list are important when analyzing an income-property investment. I also agree that the analysis is all about cash flow and cap rate (and also IRR, but not cash-on-cash -- I'll explain in a sec)

A complete analysis of a potential income-property investment should include not only its current performance, but also a reasonable projection of its future performance througout the expected holding period. Those projections are going to be tied closely to what you believe about things like employment and market trends, population growth, etc. If you see strength in those areas, then you may project higher absorption and increasing rental rates. If you see weakness, then of course you would assume the opposite.

So your projections about future cash flow, cap rates, and overall IRR will in fact be driven by the larger economic and market issues. Those issues are important to the extent you believe they will impact future performance and overall rate of return. So you see -- I really do feel very strongly both ways.

One sidebar: The reason I'm not a big fan of cash-on-cash return as a metric is that it looks at a property's performance at a point in time. If you expect to hold a property for any length of time, then IRR -- which is sensitive to both the magnitude and the timing of future cash flows -- can tell you more about its expected performance.