Getting started. Am I analyzing properties the right way?

Question

My wife and I are semi new to real estate investing but have been learning a lot in the last few months and we just want a quick sanity check that we are on a good path.

We currently have a long term rental we are planning to switch to a short term rental in Pensacola here in the next few months. We've been using the Airbnb calculator and a local STR management company to get a good gauge on potential income. All the numbers I'm seeing look like STR will give us roughly 3x the net income from the property which would really help us get capital to pick up more properties.

We’ve been analyzing potential future properties by using the rent estimator and comps from the area. Trying to get as close to the 1% as we can. Usually closer to .6-.8%. I recently found the Eppraisal website that gives a very rough estimate of property value to see if it might be overpriced. Then running STR numbers and seeing what potential there might be. We’ve been using the free Neighborhood Scout website to get general info on the area and appreciation.

Our idea is to pick up a hand full of STRs to boost our capital to get into multi family or mobile homes parks down the road. It feels like a good idea to find properties that will still cash flow as a LTR as an escape plan incase STRs don’t work out.

I know it’s a long post but does this sound like we are moving in a good direction or is there something we might not be seeing. Thanks for the help!

Mike D'Arrigo · Answer

@Peter Chambers the problem that I see is that you are relying heavily on automated internet tools which I don't find to be very accurate. Nothing beats having on the ground expertise. I'm not a big believer in the 1% rule because it's not a meaningful number. It's a top line number that tells you nothing about the bottom line return. Having said that, I would say that there is something wrong if you are only getting a .6-.8% ratio on STR's. I don't know what market you are in, but you should be able to do better than that on a LTR.

Joshua Janus · Answer

Getting your real estate license is a great idea to help boost your investing career. It has helped me find a few deals and will help me in the future as well. If this isn't realistic for you, I would advise adding an investment friendly realtor to your team. You really want someone that invests in their market themselves and understands the numbers. They should be able to determine the COC, annualized return, estimated ARV of a BRRRR, accurate rent comps and more. The valuation and market value of a multi family property differs from a single family and you want someone that understands the distinctions if you go that route. If they just represent first time single family home buyers and aren’t constantly finding off market properties and reviewing deals, you’ll find a better investment through someone else.

Peter Chambers · Answer

That’s great, Michael! Thanks for taking the time to lay all that out. My wife is looking at getting her real estate license for the same reason. I really appreciate all that info. I will absolutely be looking into some of those resources!

Michael Hamby · Answer

Hi @Peter Chambers!    I appreciate that you are trying to be self sufficient as there are many benefits for speed, and you personally feel confident in the data.  This is the main reason why I became a real estate to supplement my investing strategies.   Make sure you are following the property USPAP guidelines for appraising property value because the only person's opinion that matters is the appraiser when financing

I put little to no weight in appreciation.  Consider that a bonus if the market continues to go up but the numbers need to make sense today.   I  personally make sure the property will be successful as a long term rental and consider short term rental income a bonus.  I do consider appreciation if the neighborhood is experiencing gentrification.

Here are the tools I would use short of getting your license as a real estate agent to get access to MLS.    I suggest looking at 3 sources and averaging them for your final opinion of value.  Paid subscriptions are much better than free valuation tools.

Property Value

1) PropStream(Paid Subscription),

2) Santa Rosa County will give you recent nearby sales on their County Appraiser site

3) Realtor.com(Consider the price estimator but search nearby sales manually)4) Zillow.com(Consider the price estimator but search nearby sales manually, least accurate)

5) Confirm with a real estate agent before signing a purchase contract or during your inspection period.  Reducing purchase price after going into contract will provide a bad reputation.

Peter Chambers · Answer

Thank you for that input Mike! I absolutely agree that having a person who knows the ins and out of the market first hand is much better. I have a couple contacts in the area that are in real estate who can give me some of that insight but I also want to be able to do most of my own research and not just ask them for good properties. Do you have any advice about how to evaluate properties more accurately? With the 1% I was talking about looking at the properties from the LTR perspective as a back up to running it as an STR incase, for whatever reason down the road, it can no longer be a STR. I’ve read that COC is a good way to look at STRs and it seems like anywhere from 10-20% is a good window. I try to be as realistically conservative when using these rules and not just looking at the best case scenario.

Getting started. Am I analyzing properties the right way?

Most Popular Reply