040: Analyzing Rental Properties – Part 2

SHOW NOTES FOR EPISODE 040  –  ANALYZING RENTAL PROPERTIES – PART 2

In this episode, Bill goes more into depth on property analysis as he elaborates on the “investigative stage” of the rental property analysis process.  To get good numbers you need to become a detective or “CSI guy” to dig deeper.  The better the data, the more accurate the final assessment.

Introduction

OK, in part 1 we looked at an overview, using courtship as a framework, as you move toward signing closing documents.  In this episode we start digging deeper to get good data to make our final analysis.  Because of time I will keep it light.  I won’t be able to list every  little expense and detail but you’ll get the idea.  You’ll have to determine the details you’ll need.

Single Family vs. Multifamily Analysis

The market value of single family properties are usually determined differently.

• Market comps comparing similar sized and types of homes are usually used
• The market determines value

Multifamily properties

• Value is determined based on the income/profit it produces for the owner
• SFRs could be going declining in a market while multis are going up

As I mentioned in part 1, your first step is to sift through a lot of properties to determine a few that look good.  You may find one or two that you may want to even submit an offer on just so you can move into the final analysis stage.  Part 2 is all about digging deeper

Gathering Information

In general, good financial analysis involves plugging info into your financial model to see what final results get kicked out to help you determine if property is a good or bad investment.

Here’s what data you’ll need:

Property Details –Physical info on property:

• Number of units
• Square footage
• Utility metering
• etc

Purchase Info – Basic cost

• Purchase price
• Price of rehab
• Capital expenditures hidden and needed

Financing Details – The loan you are going to need

• Total loan amount
• Downpayment amount
• Interest rate
• Closing costs
• Other fees

Income – generated by property

• Detailed info to verify projections
• Rents
• other income
• Compare P&L data to bank statement deposits

Expenses – Costs to maintain property

• Detailed info
• Property taxes
• Insurance
• Maintenance
• Ongoing services
• Utilities
• Property management

Getting good data is key.  Remember garbage in/garbage out

Pro-Forma vs. Actual Data

• Sometimes it’s good. Most of the time it’s not.
• Seller i always trying to make the property look good
• Higher estimates are common to make the property look better than it is

You need to play detective – be the CSI Guy

• You have to dig deeper
• Get actuals
• Ask for actual P&L data for the last 12 months or longer
  • Then look to verify that data
• For property details
  • County Assessors Office records
• For Purchase Price
  • Ask seller why he thinks it worth the amount
  • Really research repairs need now AND in the future (does the plumbing need to be replaced, the boiler replaced, etc.)
  • Is it in a flood plain? Toxic dump site?
  • A good inspector is key here
• Financing details
  • Get a letter and details on your loan from your bank or mortgage broker (points, extra fees – everything)
• For Income
  • Ask for bank statements to prove the deposit amount match with the net income amounts
  • Check market rents
  • Talk to current property manager
    • Is there much turn-over?
    • Lots of evictions?
    • Lots of late pays?
• For Expenses
  • Ask for copies of the actual property expenses
    • tax bills
    • Insurance statements
    • Utility bills
    • Service contracts
    • Also talk with the property manager

Well that’s it for today!

NEXTWEEK (Part 3) we will go more into using the info you collected to create the ratios that determine whether the property is a good or bad deal.

So, until next time, remember CASH FLOW IS KING AND REAL ESTATE INVESTING THE MEANS.  Thanks again for listening and God bless!

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