YOUR 7 POINT CHECKLIST WHEN BUYING SUSTAINABLE INVESTMENT PROPERTY
November 7, 2017 By Larry Arth
As you buy more investment property, you will organically discover what the deal must have for it to be a great investment. It may not happen right away, but as you own these investment properties over time you will see that some will outperform the others. There is always the few properties that continue to provide the best overall net cash flow.
I have many clients (and present company included) who repeatedly say things like, “I need more properties like my 19th St. properties”, or more properties like the Kansas City, or Cleveland properties. You see these are the properties that always produce the best overall net returns year after year.
You ask yourself, if you have the same buying criteria for all properties why are some performing (over time) so much better than the others?
Time to think outside the box…. Time to think of Smart investments
“It takes a smart man to make a million dollars; it takes a man 10 times smarter to keep a million dollars”!
I am not sure where I first heard this quote from but it is a favorite of mine that sticks with me. The parallel of course is anyone can buy a good investment property that makes sense on paper. It takes a much smarter person to buy one that can sustain top performing net ROI over time.
Everyone knows you have to look at a property that looks good on the pro-forma and a property that is structurally sound and a bunch of common sense pieces of diligence that need to be done when buying investment property.
Sustainable investing triggers
It is the less common things that tend to be your sustainable investing triggers. I may be one of the only people who talk about sustainable investments, but this has become a passion of mine after the real estate bust back around 2007 when I saw certain areas skate by fairy unscathed while other markets suffered and lost bigtime.
These 7 questions you should ask before buying an investment property pretty much focuses on the principle of location, location, location as it relates to real estate investing!
Ask yourself before choosing an investment, “Is this the best location to purchase an investment property?”
I say it daily, but it bears repeating… investment property is all about location. You should not look at any properties without first knowing you are looking in the best location. A location that has job growth, population growth and that is undervalued and can sustain growth and cash flow.
Here are the 7 questions you should ask before buying any investment property:
1. Does the area provide for low taxes and insurance rates?
Controllable expenses are paramount to sustainable investments. Markets with high insurance and or high tax rates cut into your cash flow. If they are high when you buy them they are more prone to sharper increases than areas with low rates. High insurance rates for example tend to be in areas that are prone to tornadoes, hurricanes, earthquakes, etc.
2. Where is the path of progress?
Once you identify the best city for you, are you looking for property within the path of progress? In other words, which direction is the city growing?
If the city is growing to the north corner because a new Toyota plant just opened, then all your commercial builders are adding strip malls and gas stations, etc..
Therefore, this is where jobs are heading and where everyone wants to be. If you purchase in the south end of town, you may not have the same demand level as near the path of progress. This is where your tenants may work and they will pay a premium to be by work. Needless to say your property values will be stronger here as well.
3. What is the walkability score?
This may be confusing but think of it this way, “What is nearby that would attract your current day tenant as well as your exit strategy, end user (Buyer) to want to live here?”
As you are investing today for top cash flow you want to provide a place your tenants will pay premium rents for. Plus you are investing for future growth, you will have an exit strategy where you will sell a house to a retail buyer. This retail buyer will want shopping and movie theaters and schools nearby.
When an end buyer has everything they want nearby, they are willing to pay full retail. To get the equity growth you are looking for, and to fully know your exit strategy is solid, it is imperative that you begin with the end in mind and consider all these factors.
4. Is this an undervalued market?
The U.S. as an average considers a house that you can buy and pay for with three years’ worth of income (based on median income) to be considered a balanced market, Another way of looking at it is simply 33% of your annual income to pay for a house.
When the person who earns the median income in your city can buy the median priced house for less than 33% of the median income it is considered an undervalued market and prone to higher growth potential. Do you know there are undervalued cities where you can buy property from 20% to 30% of the median income. Consider these markets for strong sustainable investing
5. Strong Local market fundamentals
A very important thing to remember, you are not just investing in a property. On a bigger picture you are investing in the local real estate market. If you invest in a property that is not poised and positioned for growth your investment is made on a hope and a prayer. The investment cannot perform with sustainable returns if the city does not have strong fundamentals strong market
6. Do you have access to GREAT property management?
Every investor knows the return on investment is made or broken based on the property manager. You want to have options and want to interview the property management thoroughly. No second best is acceptable here. This is your financial portfolio, so choose wisely. Contact me for a great list of questions to ask when hiring a property manager
7. Baby Boomer and or millennial appeal?
The two largest segments of renters and buyers are the baby boomers and the millennials. Knowing what these two groups want and catering to their housing needs will help you to have a strong rental market as well as a strong execution of an exit strategy of selling to the retail buyer for top dollar when the market suggests it is time to sell.
OK, NOW you can look into the property itself:
The structure, the condition and the shelf life of the roof and HVAC and all that stuff (yes, for purposeful investors this concern comes down further on the list.)
As you can see the performance of the property is second to the sustainability factor for the investment.
Once you start evaluating property for sustainability first you will be investing like the seasoned investors who make millions in real-estate.
The road to buying an investment property is, and should be, paved with many questions. Do the hard work before you invest – think location – and you will have success. Now you have a passive investment that will allow you to spend time on the beach knowing your portfolio is purposeful.