If you are interested in becoming a real estate investor this article can be helpful to you. One of the things you should know is how to do a rental property evaluation.

There are many factors that you have to consider when doing a rental property evaluation. There are some investors who are interested more in the property itself rather than how the property will perform as a rental. 

When choosing a rental property, always try to find out if you will be able to create permanent income or cashflow for a long period of time from that property. It’s important to have a good plan. 

Property Condition

Why is property condition important? It’s important because it has a direct impact on both the price of the property and the money you will pay to renovate the house or to repair it. For example, imagine that you are buying a property, and you are satisfied with the price you paid for it. 

Before you can rent it, you have to make repairs. In the repair process, you understand that you have to repair the electrical installation. It will cost more than you envisioned. You tell yourself, I’ll fix it, but it turns out that you have to completely replace the electrical installation of every part.

Then you realize you don’t have enough money to complete these repairs. This sounds like common sense, but many investors make this mistake. This is how many less experienced property investors can get into a situation where they have lost all of their repair money. To prevent this from happening, you should consult a professional to check properly the condition the property is in before you buy it. Do you need to repair it? 

If so, what kind of repair and how much will it cost? It’s recommended that everyone, regardless of whether you are new or experienced in property management, invest in properties that do not require extensive repairs. It can be enticing to purchase a “fixer upper”, but these often are more work than they are worth unless you have an experienced team in place.

How to Evaluate Rental Property

Your rental property should be considered a long-term investment. It would be a good idea to do your own research and check comparable prices online. Determine what real income your property can generate on a sustainable basis year after year. 

How do you analyze a rental property and make sure that it is worth buying or not? Let’s start by finding your rental income: hypothetically you buy property for $200,000 and let’s say your income from this property is $2,000. Next you need to calculate how much your expenses cost, this includes taxes, insurance on the rental property, utilities, homeowners association fees (HOA), repairs, vacancy, management costs, and mortgage.

For example your expenses are $1,610 then your cash flow is $2000 – $1610 or $390 cash flow. The next step is to determine your cash on cash return on investment (ROI) this will help you understand what kind of return on your cash flow you are getting.

How much money do we put into this investment? To know that we must calculate the down payment, closing costs, and money for repair. After we combine these property costs, let’s say we calculate a $50,000 investment. From here you want to take your annual cash flow which is  $390 x 12m = $4,680 now we are going to divide your annual cash flow and our total investment.

$4,680 ÷ $50,000 = 0.0936 or 9.36% cash on cash ROI.

This is one of the ways you can calculate to make your rental property evaluation. Keep in mind that the numbers written down in this example may not accurate an accurate calculation for your property. This is why consulting a professional property manager can be valuable. Depending on where you live, you can make other calculations, but still, the calculation method will be similar.

When determining rental property evaluation the values can be made based on certain characteristics of the property like the number of bedrooms and bathrooms, back yard, pools, decks, fireplaces, or driveways, garages anything that makes a property unique and helps it to stand out.

Every home will have a uniqueness that you can use to your advantage. The best comparable price to determine what your home is worth would be if your neighbor is selling it. The further out the comparable property is, the less accurate the pricing may be for your specific property location. However, these comparable properties can help you determine the value of your property and guide you in the right direction.

Location

When making a rental property evaluation the location and property age are key considerations. The rental property may be in an undesirable neighborhood, close to a school or university, gated community, close to a train station, or another noisy place. 

In such a situation, you need to be aware of what kind of tenant interest you will get at such a property. Renting an older property may mean that the landlords will have higher maintenance expenses. 

Even the best property can be a failure because of its location. When this happens you may be forced to put a smaller rental fee on the property or sell it for a lower price that what you bought it.

Good Plan for Action

A business plan is a valuable tool that helps give prospective business associates a detailed picture of who you are, what you do, and how you do it. It’s a document that defines your long-term goals using high-level plans. As you scale, leverage, and grow your rental business, eventually lenders and investors will ask for your business plan.

This rental property evaluation plan should include all the costs that you may have for the property. These may include taxes, repairs, maintenance, insurance, and some utilities. You have to be prepared for some unforeseen things that could happen, such as natural disasters, which in a moment can destroy the property you have invested in and you will have to cover the damage. 

Many aspiring investors will make the mistake of giving up too early because they are discouraged by their finances. Purchasing your first rental property will be challenging, but with the right practices, it can be done.

Down Payment

To buy an investment property you will need a fairly large down payment. In most cases, you are likely to required an advance payment of at least 20%, and in some common cases 25%. If you are financing the property as an investment property, you will generally need at least 20% down payment.

Investors who work with a private money lender or nontraditional financing method will encounter more flexible loan requirements. These lenders will be able to set the terms of the loan with the borrower (and investment property) in mind, potentially leaving room for smaller down payment requirements.

Investors should, therefore, research financing methods to get an idea of the minimum down payment they will need, and start from there. Investment property down payment requirements will fluctuate depending on a number of factors related to an investor’s financial standing. 

For example, investors with a credit score above 700 may be able to make a down payment as low as 15 percent. On the other hand, investors with a credit score below 640 should be prepared to make a down payment of around 25 percent.

Tax Deductions

Owning a rental property has its advantages in terms of rental expenses you may deduct on your tax return. These expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.

You can also deduct the ordinary and necessary expenses for managing, conserving and maintaining your rental property.  Ordinary expenses are those that are common and generally accepted in the business. Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, utilities and insurance.

You can deduct the costs of certain materials, supplies, repairs, and maintenance that you make on your rental property to keep your property in good operating condition.

Vacancy Problems

When you are in the business of owning and managing a rental property you have to be prepared for almost everything. Sometimes there is a chance that your property will sit vacant for a period of time when a tenant moves out. 

In that period of time, you have to consider if you can make some upgrades and how good you are at filling any vacancy spots. If possible, you may want to plan for two months of vacancy per year when setting your rents. This is where a good property manager can become invaluable.

Effective rental advertising is essential to fill up vacant units in rental properties. Your goal should be to reach as many prospective tenants as possible. This way, you’ll have a bigger pool of prospective tenants to choose from. 

Make sure you explain all the basics of your property, the rental price, the square footage of the rooms, the included utilities, the property’s location, and your pet policy.

You can make a research project out of local vacancy rates and the average length of time that properties in the area remain vacant. It is vital to calculate and know the vacancy rate of a property. The longer the vacancy rate, the less cashflow and ROI you end up having. A good property manager will help you minimize your vacancy rate so that each of your properties is more profitable.

Calculate your vacancy rate and compare it with the properties available in different areas. A property should have a vacancy rate lower than 4% to be effectively productive for its investor.

Utilities

Every decision you make regarding utilities directly affects the services you offer to the tenant and the expense of the rental. Therefore, before you rent a property, you need to have good judgment about what utilities you will offer your tenants. You have to ask yourself some important questions like: How many bills you’re paying? Who will pay for utilities ? etc.

You’ll want to set a rent price that reflects what you are offering. Tenants need running water, heat, electricity, and trash collection. Utilities, like gas and electric, are typically the tenant’s responsibility, while water and sewer are often included in the rent.

You are required by law to provide your tenants access to utilities. You need to reach an agreement with your tenant as to who will bear the cost of utilities, whether you will share them or one of you will bear all the costs.

Repairs/Maintenance

Another vital aspect when you evaluate rental homes is to make sure you assess and make necessary repairs. You have to make a list of things that you want to change or repair and evaluate the condition of the property. Ask yourself: Do I need to change the roof, paint the walls, change the floors, change the carpet, or improve other utilities?

After that you can plan a budget for every expense that you may have like: The cost of repair. Who is going to make repairs? If you pay an independent contractor it’s possible that it will be more expensive than making the repairs yourself. Experienced property managers tend to have better rates for repair work, as well, and this should be taken into consideration.

The cost of materials can be different for every apartment or property. For example, the cost of materials for a million-dollar home can be much higher than for a fifty-thousand dollar unit. Be careful when making your budget. Often your expenses will be larger than expected. So you should always leave extra money aside that you can use in case of emergency.

Tenants

Tenants can be good or bad and your screen process must do a good job of assessing the quality of tenant. You have to decide what kind of tenants you will work with. To avoid getting bad tenants, you have to ensure that you always screen every potential renter. 

There is just too much risk if you don’t. After all, the last thing you want is to end up having to evict a tenant. As you probably know, the process is often lengthy, costly and usually time-consuming.

It is important not to rush into deciding whether or not the tenant is suitable. If you rush, you may find yourself in an unwanted situation. If you are unable to cope with this important task, seek help such as hiring a property manager or someone who has experience with this kind of job.

Summary

Rental property evaluation can help turn your property investments into a very lucrative business. It is not that difficult when you have a good and stable plan to take action on. You do not have to follow a specific way of managing your property, but it’s important to know the best practices. Look at the recommended methods and keep them in mind as they will be helpful. 

Of course, you may need help at first, you may find it confusing, but this article aims to explain and help guide you in the right direction. Do not give up at the first sign of trouble, keep boldly ahead and make wise decisions.