There are a handful of cities around the country we think offer some pretty great deals for the discriminating investor looking for an excellent income property. Too many people come to us with property information in hand, wondering if it’s a deal they should pull the trigger on or not. By the way – don’t forget that you can get a Empowered Investor opinion on any property you find on your own for only $50. Go to our product page and look for “deal evaluator.”
Obviously, we can’t tell you everything that goes into our in-depth examination of the property’s specifics and how we arrive at a recommendation about whether or not you should pull the trigger in one article, but here are seven critical numbers to pay attention to.
1. Purchase Price – The purchase price is an obvious detail that you should note. The smaller this number is, the better, though there are other factors that must line up before you pull the trigger. After all, you can scoop up cheap properties in certain Detroit neighborhoods all day long but the headache of rehabilitating and finding good renters tends to nullify any price advantages.
2. Down Payment – Unless you have a pretty amazing relationship with your lender, there’s a good chance you’ll have to put down a larger chunk of change for an income property deal than you did five years ago. Sorry, it’s nothing personal, but that’s the state of the financial industry right now, thanks to a tsunami of reckless borrowers about ten years ago. These days, it’s fair to say that you will probably have to put down around twenty percent of the total purchase price in cash in order to get financing. No sense in pouting. That’s just the way it is.
3. Initial Cash Investment – The initial cash investment is the sum of the purchase price and any closing costs associated with buying the property. Be careful that the seller or his agent don’t sneak any stuff into closing that you didn’t expect. In fact, if you’re prepared to drive a hard bargain, and the seller is motivated, you might be able to craft a property deal where you don’t pay ANY closing costs.
4. Operating Income – Before you seriously consider buying any property, you need to take a close look at the income projections. You’re doing this to make money, right? Unless you have income projections, you don’t know if it’s a good deal or a bad one. Property Tracker is the software we use and highly recommend. Enter the numbers and it spits out a nice, neat encapsulation of the important details related to the deal. Operating income is the gross amount of money you expect to take in from rent the first year of owning the property. Multiply the monthly rent by twelve, subtract vacancies, and what’s left is operating income. If you don’t have actual numbers, use 5% or 10% for vacancies, depending on how conservative you want to be in calculating ROI.
5. Operating Expenses – Next up are your operating expenses. Any costs associated with owning, maintaining, and renting your property fall into this category. Examples would be property taxes, insurance, management fees, advertising fees, and maintenance. Right away, if you see that your operating expenses are way more than your operating income, you’ve got a problem. Already the deal has no hope of positive cash flow. This fact might not be an automatic deal killer but should give you serious pause to consider.
6. Net Operating Income – After expenses are subtracted from income you are left with net operating income. This is all profit, right? Happy happy, joy joy! Not quite. You still have to pay the mortgage note every month. This doesn’t fall into the operating expense category but still needs to be taken into account. So go ahead and subtract mortgage expenses from net operating income to find out if the property will provide a positive or negative cash flow.
7. Cash Flow – If you’re left with any kind of positive number here, you have the makings of a great property deal. Think about it like this. Income from the property will cover all expenses, including mortgage payments, which essentially means you are getting the investment property for free. This doesn’t mean that a property deal has to provide positive cash flow to make financial sense, but it is a strong indicator.
You will likely find yourself far ahead in the game if you take into account the preceding seven factors when it comes time to nail down your next property deal. You can thank us later.
The Creating Wealth Team
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