7 Things to Do When Analyzing Properties
If you're wondering how to analyze properties, here are some tips:
So, you’ve been looking at properties and have found a few that you like and think would work as rental investments. Now, how do you figure out which one is the best? It’s surprisingly easy! It does involve a bit of math, but don’t let that turn you off if you aren’t a math whiz- most of it is nothing more than simple addition and subtraction.
Here are some tips that I learned from Robert Kiyosaki on how to analyze properties.
1. Look at 4 different types of income.
While the obvious income you’ll be looking for is the cash flow you’ll be receiving from rent every month, there are a few other types of income you can get from a rental property, and you’ll want to make sure you are analyzing all four types when looking at potential properties.
The four income types you want to look at are:
-Regular cash flow:
The amount you get from rent
-Depreciation:
Also known as “phantom cash”, depreciation refers to the amount your house will lose in value over time from normal wear and tear. The good part about deprecation is that it’s tax deductible.
-Appreciation:
This is the amount that your house will go up in value over time due to improvements, location, etc. You want your house to appreciate in value over time, because you will ultimately make more money that way!
-Tax-Free Appreciation:
While you will have to claim some appreciation on your taxes, there are lots of loopholes to this and it’s pretty easy to avoid paying taxes on it. Talk to your accountant about what times of appreciation are tax-free!
2. Take into consideration all the numbers.
Like with income, there are more expenses and numbers to look at besides just your mortgage payments. While that is definitely one you’ll want to look at, you’ll also want to look at:
- Initial purchase price
- Average rent in the area you are investing in
- Whether the area is increasing, decreasing, or staying stable in terms of population
- The vacancy rate (5% is standard)
- Taxes
- Maintenance
- Your mortgage payments
You’ll want to make sure you are factoring all these costs and expenses into your potential property to get a more accurate idea of value.
3. Never offer the asking price.
This one is pretty self -explanatory: never offer the price the sellers are asking for. You always want to ask for less than what they are asking for. If they decline, it’s easy to then offer more.
4. Decide the amount you want to put down.
This one is also pretty self-explanatory. You’ll want to decide before making your offer the amount you want to put down. Some sellers will have fixed amounts they want for the down payments, but oftentimes it’s flexible.
Depending on your current finances, you may want to go with the lowest down payment, which can be a smart choice for investors. However, keep in mind the more you put down, the lower your interest will be.
5. Analyze your neighborhood.
You’ll hear this over and over, but I’ll say it once more: location is the single most important thing you need to keep in mind when looking for properties. So, once you’ve selected a property you like, take a look at the neighborhood.
If you’re in a neighborhood that is currently appreciating in value, you’ll be getting a bigger return in the coming years. If your location is staying stable, that most likely means that even if your returns don’t grow they will stay solid.
The upside to this is that no matter which direction your neighborhood is trending, your mortgage will, at worst, just stay the same! Remember- your banker won’t care if your location is appreciating or deprecating in value; their rate and what you owe them will always stay the same.
6. Put offers in on a few properties.
Once you’ve found a few places you like, go ahead and put in offers on all of them! It costs you nothing, and you won’t know your exact price until you actually put in an offer and have it accepted- or rejected! It’s totally common to be rejected for offers, so at that point you can decide if you want to re-submit with more money or simply let that one go.
7. Don’t have enough money? No problem.
You may hesitate on submitting an offer on a property because you don’t think you have enough for the down payment, but don’t! There are few things you can do to either borrow the money or negotiate a lower down payment:
- Bring in another investor: a family member, friend, or colleague that you know has the capital; ask them if they want to be partners
- Talk to the sellers about re-financing options
- Delay closing and ask for a re-appraisal
Don’t be afraid to get creative! There are more options than you think when it comes to getting the money together.
Now that we’ve discussed the ways to analyze your properties, it’s time to put these lessons into practice. So grab a sheet of paper, a calculator, your listings, and get to work!
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