I have bought over 1,200 SFR properties in my own name and considered tens of thousands of others doing underwriting due diligence for a major investor lender. I offer these initial observations to you to help you avoid mistakes I have made. If these conditions exist your pre-purchase analysis may be unnecessary. There are exceptions to this that an experienced investor may be prepared to live with. Think of this as a pre-analysis sanity check. If an investment property doesn’t seem right, it probably isn’t a good investment.
- The first question does this a location fit my strategy?
Any location works if it fits a pre-determined strategy and a plausible exit whether this is a candidate for a flip, mid-market or Section 8 rental, or a wholesale opportunity. A property in one zip code may be a sound fix and flip, but a similar property in another zip code equals an ideal rental, while this same property in yet another zip a Section 8 or wholesale candidate. Understand your strategy, your expertise and your financial capacity as it relates to this property.
- Now look at the characteristics of structure?
Does this house meet the fundamentals of typical house in the neighborhood? A 3 bed/1bath house in a 4bed/2bath neighborhood is less desirable. Is there just a car port when this is a neighborhood of homes with two car garages?
- What is the condition of the property?
First this is relevant to the cost of a renovation and secondly, how fast the house can be renovated, marketed sold or rented. Adding time effects holding time and carrying costs while delaying exit and payment. A property renovation when targeting distressed assets is 20% to 40% of purchase price and capped at the expected sale price. If it works as a flip, this can positively affect velocity of capital. Any delay works the other way. When rentals take an extra month to lease-up this affects the return on the investment over the first three years. More delay equals less return.
- What are the inherent risks in this asset?
Do you see a defect or a functional obsolescence in the property that you (a buyer or a renter) will have to live with or overlook to sell or rent? An example is access to fourth bedroom through a third bedroom rendering the description as a fourth bedroom questionable. Maybe a garage that has been badly incorporated as living space thereby losing garage space necessitating uncovered parking? Achieving a workaround during any renovation is an added cost that may still not remove “a wart.”
- Are there other external influences that reduce property desirability?
Is the property close to a power plant, transmission line, overly busy street, apartments, school, open field, commercial, or a particularly noisy/troubled apartment building? No amount of renovation or “cheery marketing copy” can make these less intrusive or more peaceful for the next occupant.
If I am doing a flip I want the house that has potential to be the nicest house in the neighborhood. Paying attention to this will lead to a faster sale.
If this is to become a rental I want this to become the safest house in the neighborhood for my tenant based on location and operation. Paying attention to these considerations means the property will rent faster, for a better than market based rent, to an insightful tenant and who will stay longer. This reduces my vacancy rates and maintenance and management overhead.
If you are uncertain about your search and analysis process we are happy to offer advice and assistance. Contact us to learn more about our consulting programs.