When buying a rental property, you will need to estimate its value so that you can know how much you should offer to the seller. Your skills in property evaluation will greatly determine whether you will get high profits or end up in losses. The followings will help you evaluate a rental property purchase before making a final decision.
Consider 10% Return Rate
Before you try real estate investment, you should know that it’s a risky venture. However, the risks involved can be avoided by being smart in the bargaining process. The idea of buying a property which can bring 10% annual return was suggested by Jim Randesh in his book, “The Skinny on Real Estate Investing”. For instance, a rental property that is able to generate an annual net operating income of $30,000, you should buy it at around $300,000.
If you buy it at a price higher than this, you are at risk of gaining little return from your investment. By utilizing the 10% return rate to calculate the value of the property, you will very safe in any market condition.
Evaluate The Location
As a real estate investor, you should know that the location of your property can greatly affect your net operating income. You should look for a place which will add value to your property and a good realtor can assist you with this.
For example, a rental property located near a college or university will have a constant supply of tenants. This means that your property will never have a vacant space any point in future. Also, a property located along a major highway will have added advantage as people like to stay near a form of transport.
When buying a property in a certain location, calculate the losses you would occur when the property is vacant. For instance, if your property stays for 3 months without a tenant or tenants, how much will you lose? Check how this period of vacancy will affect your 10% return rate.
Evaluate the Cost of Repairs
A good real estate investor should be able to estimate the cost of repairs in a rental property. I know this will require some experience but if you lack this “money saving” skill, you can choose a construction expert to do it for you. Incorrectly estimated repairs can leave you wagging in losses which you could avoid.
Evaluate whether the property requires repairs and if it does, how much they will cost you. This cost will be determined by whether you will do the repairs yourself or you will hire a professional. The materials you will need to buy plus the amount you will pay your construction expert will determine the total cost of the repairs. Remember that repairs will always cost you more than what you had planned. A two-week repair job may turn out to four weeks.
After Repair Value (ARV)
After you have determined the cost of repairs, you must calculate the After Repair Value (ARV). In order to get this value, you need a realtor. Your realtor will provide you with a list of other comparable properties nearby which you can use to estimate the ARV. Remember that the properties your realtor will give you for comparison should follow certain criteria.
- 1.The properties should be between a half a mile to one mile away from your interested property.
- 2.The properties should have been sold between 90-180 days prior to the day you are purchasing the property.
- 3.The size of the properties should match the size of the subject property.
When the “comparables” follow these criteria, their value will reflect the true value of the subject property. Remember also not to choose comparables which were not sold as short sale or bank owned.
Evaluate the Value of the Property With the Current Market Value
Before you buy a rental property you should look at the current market scenario and bargain accordingly. It’s very risky to buy a property during a recession. Remember that real estate is all about buying and selling. Check the current markets resell value and plan accordingly. You don’t want to buy a property and hold it for 10 years in order to resell it. A good property is one that you can resell at any market condition and still get good profit.
Evaluate the Mortgage Monthly Fee and Net Income
In order to evaluate a rental property purchase, you need to take a look at the property as well as the mortgage terms. If you only look at the property and wait for it to appreciate until you sell it, you might end up broke trying to meet the monthly payments of the mortgage. By checking the terms of the mortgage, you can figure out whether you can afford the monthly payments. Also, you should see whether the property will be able to generate a monthly profit for you after you have paid all the other fees and expenses.
Evaluate Whether the Value of the Property Can be Increased
It really pays in real estate to buy a property that you can upgrade and resell it at a high profit. Check whether you can add value to the property so that you know whether the property is worth. For stance, check whether the property has space where you can rent to add to its total income. Check whether the rooms can be upgraded to increase the rent and more.
Evaluate its Appreciation
It pays to speculate the appreciation rate of the property you intend to buy. If you see depreciation in future, you should rethink your decision to buy that property. If you foresee an increase in value let’s say 2 years after purchase, that property is worthy to buy. If the value will likely remain constant, you will have to press harder on the bargaining. A realtor will help you in this evaluation as they have experience in real estate.
These analyses are important whenever you want to evaluate a rental property purchase. It will help you plan things out and you will be better prepared in case of any eventuality in future.