New real estate investors often ask the question, “what is the difference between wealthy people and average people?”… the answer, “how they think!”
I continue to see a clear difference that separates seasoned investors when doing their due diligence on investment property from the newer investors. It is the questions they want answered. Their checklist tends to be much different.
Average investors want to know the basics:
- How much does it cost?
- What can I get it for? What can I rent it for?
- What is the tenant demand?
And questions based to help a person make a sound buying decision. Absolutely pertinent information to know.
These are short term questions about passive the needs for today. These help to establish cash flow and returns on investments.
Seasoned investors want to know MUCH more:
Seasoned investors however have a much longer term vision in mind. They look beyond the brick and mortar and the ROI. They are looking for long term sustainable income (cash flow).
Plus they want to make sure they not only have great cash flow today, but they also want to increase their potential for great equity growth in the future. They understand that equity growth is what creates millionaires.
While no one can guarantee equity growth and good investments need to be made based on their ability to generate cash flow, doing the extra diligence can allow you to have both. Seasoned real estate investors understand that buying in an equity growth market is the first step to creating equity growth.
7 questions seasoned equity growth investors want to know going in
What is the population and how is it trending up or down? You want a market that is growing in size. Growing markets offer sustained cash flow. Shrinking populations suggest declining prices and decking rental rates. You want population growth that supersedes the national average.
Job growth and job diversity:
Jobs attract people and diversity of numerous industries within a city creates sustainability. We all know what happened to the motor city, Detroit, when the automotive industry left. That population went from 1.2 million to 800,000 in a very short time. What do you suppose happens to rental rates and home values when that happens. Job diversity is key to sustainability.
What does the local government have in place (if anything ) to attract jobs and business. Strong growing economies tend to have 5, 10 and even 20 year vision plans in place to attract growth. New businesses create jobs that create renters and sustainability to cash flow and future capital growth. Without a plan to grow it is simply a game of hope.
Tax and insurance rates:
Does the area provide for low taxes and insurance? Areas prone to storms, high wind, earthquakes, etc. are costly to insure. This comes directly out of your cash flow. Same for high taxes. Markets with low taxes and insurance put more sustainable cash flow in your pocket each month.
Baby boomer or millennial appeal:
Is there baby boomer appeal in this market? Baby boomers are spending billions of dollars in their retirement. Millennials are the largest segment of the population and some of the largest income producers. Appeal to these two population classes brings population growth, revenue and sustainability.
Path of progress:
Where is the path of progress within the city? If the city is growing to the north, you want to invest in the north end of the city as that is where the demand and money is moving.
Affordability in the market:
Median income should equal 3 times the median home price. This is considered the national average home price for a market place. You want to be at or below that of the national average to further increase your odds of growth potential.
Now on to the general queries…
- Does the property actually generate good cash flow?
- Can you charge rent that will give you competitive returns?
All too often people start at this question without going deeper into the sustainability questions above. If the above questions are not answered favorably, the cash flow does not matter as it is may not be sustainable.
I have seen so many people lose interest in real estate investing because they bought property that looked great on paper but simply was not sustainable over time.
If you do not have sustainability to your cash flow, run from it. Many people generate a piece of paper (the pro forma) that looks good. If it is not a sustainable set of numbers, you do not have a good investment. The above questions will help ascertain if the investment is sustainable.
Bonus investment property question:
Do you have access to GREAT property management? Property management will make or break your investment so it is imperative to have great property management.
Darn: that leads to another set of question. What should I be asking about Property management? Find out more in this post…Due Diligence – Property Management