The basic calculations that underlie all real estate investments are, of course, the numbers. You certainly will not make a real estate investment decision on any rental property without conducting a full real estate analysis that reveals the cash flows, rates of return, and profitability of any property. This goes without saying.
Nonetheless, there are some other bits of valuable information about the rental property you will need to gather in order to feed the correct data into your real estate analysis and ultimately (hopefully) to help you to make a wise and profitable real estate investment decision.
For this discussion, we will categorize that additional data as “property related” and “market related”. That is, the information that directly concerns the real estate investment property itself, and the information about the local market in which the property is located.
Property-related
Naturally, you will want to know as much as possible about the income and expenses for the rental property you’re considering to purchase. Remember that you’re buying income stream more than a physical property. Only women are beautiful, so in this case you just want to validate the accuracy of the basic income and expense numbers presented to you by the seller or seller’s agent.
1) Review the leases to be sure that they are consistent with the seller’s representation regarding length, tenant options to renew, and at what rates.
2) Check the property tax bill to be sure that the current seller isn’t enjoying some sort of tax abatement that is about to expire or may not apply to you as the new owner. Also consider whether the property will be reassessed following a purchase and how much in property taxes you will pay to own the income property.
3) Look at the utility bills (at least in part) to see whether they match up with what the seller has told you. If you discover discrepancies, ask for an explanation to either satisfy you or cause you to wonder about the seller’s truth and accuracy.
4) Try to obtain the seller’s Schedule E tax return to see whether income and expenses claimed to the IRS line up with what you are being told. Though most sellers are reluctant to show any personal tax information until after there is an accepted offer, ask anyway.
5) Be sure to include language in your offer to purchase the property that makes the seller responsible for providing truthful information and lets you off the hook if you discover otherwise.
Market-related
1) Conduct a comparative market analysis to determine what comparable rental properties have recently sold for. This is typically easier said than done because often there is a lack of enough comparables to be meaningful. Nonetheless, you can get a general feel for your market using a gross rent multiplier, price per unit, and price per square foot for whatever buildings have sold. Any commercial broker worth his salt can do this for you; so you might consider building a relationship.
2) Learn what tenants are willing to pay for space in your market place. In the case of an apartment complex, for instance, what are the monthly rents tenants are paying to occupy various unit configurations? A local property management company can be a great source for this and could be of service to you later so you might want to start interviewing; otherwise you should drive the area and call on the For Rent signs.
3) Survey what the capitalization rates are for a particular type of property in a particular geographic area. If you don’t know what a capitalization rate (or cap rate) is than by all means do some homework because it is one of the rate-of-return measurements that you will want to know when real estate investing. For your survey, commercial brokers or appraisers are both good resources.
Okay, it’s rather general and might be data more difficult to uncover in some areas than others, but you get the idea.
The fundamental issue is to gather what you can to make your real estate analysis of the property’s bottom line as meaningful as possible. After all, investment decisions should only be made only after the real estate investor knows what’s really going on with any investment property under consideration.
