How can you determine before signing on the bottom line, whether or not a property will be a profitable venture? It is important to learn as much as possible about the property under consideration in order to make an educated decision. Doing your homework ahead of time will help keep you in the black as an investor.
First of all, you need to find out the rate of vacancy for the property. Is turn over high or do tenants tend to stay long periods of time; say at least 3-5 years or more? Depending on where the property is located, it's condition and a few other factors the vacancy rate could be negative. Higher rates of tenant turnover are more costly to operate in terms of time and money. Another factor to consider on the income side is whether there are other available sources of income including coin-operated laundry machines, vending machines, and garage rentals. These additional sources can help offset the lack of income flow during vacancy periods.
It is also important to determine what expenses a property will have that will reduce the amount of cash flow. Property taxes and homeowners insurance are pretty easy to determine but what about maintenance, advertising, property management, and utilities? How old is the roof? How about the HVAC system and other appliances, what is their condition? Has the electrical system been updated? Is the plumbing galvanized or copper? How do the windows look? All of these items can be cost a pretty penny and will detract from the value of the property from an investment perspective.
In general, these are the items you will need to consider to determine a property's cash flow:
- Purchase Price
- Condition of Rental Market in the Area
- Vacancy Rate
- Down Payment
- Interest Rate
- Net Operating Income
- Is the subject property a House, Duplex, Fourplex or Multi-Unit?
Of course, there is no full proof way to predict the future value of a property but being well educated on its past performance will take away some of the risks. As always, anyone contemplating the purchase of an investment property should seek the advice of a competent and knowledgeable attorney and tax advisor.
Until Next Time...