SS211: Strategies to Avoid Overpaying for Your Rental Property

SS211: Strategies to Avoid Overpaying for Your Rental Property

Money in real estate is made when you buy, and avoiding overpaying for a rental property requires a knowledgeable approach. In this episode, Charles discusses some tactics for performing better research and financial analysis when purchasing your next rental property.

Watch The Episode Here:

Listen To The Podcast Here:

Talking Points:

  • “You make your money when you buy” is a famous real estate investing phrase that perfectly fits with the topic of this episode. How well you purchase a property will determine the profitability of the deal. In other words, the profit is determined before the property closes, not during the ownership period.
  • When I look back on previous deals I have done, both ok ones and very good ones, I believe a few things have made the difference between the two.
    • 1. Understanding the market and submarket. For example, the largest MSA (Metropolitan Statistical Area) in the United States is New York/Newark. Still, several submarkets within this MSA can differ widely, including Manhattan, Brooklyn, the Bronx, Newark, etc.
      • What makes for a good market or submarket?
      • Population growth
      • Income and job growth
      • Employment and job diversity
      • Landlord friendliness
    • 2. Understanding the specific neighborhoods where you are looking and investing.
      • Looking at the income maps, you can see precisely where the neighborhoods change regarding income. Usually, these areas are separated by a highway, busy street, train track, or body of water, but understanding the income of an area will allow you to understand the potential of a property quickly. If the area’s median income is $30,000 and your business plan is to increase rents from $800 a month to $1,200, that will price out the current population. It is more than 1/3 of their income.
      • If you are serious about purchasing property in specific neighborhoods, you or someone trusted on your team needs actually to drive them. You can utilize technology to find current rents, sale prices, and the status of properties on the market, but you need to see the area and review the comparable you are reviewing. If you plan on renovating units and raising rents to match another property in an area, go to that property and mystery-shop it. It will give you the most accurate idea of what a property requires to achieve those rents in that area. You can now adjust your underwriting accordingly.
      • The main lesson here is that neighborhoods change, usually fast, and a subject property a quarter mile from a comparable you found online might not be an accurate comparable. Additionally, your potential tenants will visit the property before renting a unit, and they will notice the property and the surrounding area.
    • 3. Thorough due diligence. I will not go through the entire due diligence process, but there are a few main areas with investors that seem to cut corners.
      • The first part is the financial audit. Before you make an offer, you should have reviewed the financials and confirmed that you can renovate the property, increase rents, and increase the net operating income. However, during due diligence, we are now verifying the accuracy of those financials. Do the deposits match up with the bank statements? Do the expenses on the financials match the bills provided to you? Are all the property expenses accounted for, or are they missing some? Are there any irregularities?
      • The second is the lease audit. Run each tenant through a state search to see if they have been evicted. How complete is the tenant’s application package? How long have most of the tenants lived there? Many new leases in the last 30-90 days always make me nervous since the seller might have just rented to anyone to improve the property’s financials. This tends to lead to evictions.
      • The third is the physical inspection, or unit walk-through. Don’t be afraid to hire a property inspector and additional contractors to perform the unit walkthrough. If you are a new investor, maybe you pay a contractor to initially tour the property with you before making an offer. Minor issues on the surface might lead to costly repairs down the road, and it is essential to hire professionals to walk every unit in addition to reviewing all of the major aspects of the property, including the roof, plumbing/drains, HVAC systems, etc. If there is an issue, the contractor is already there, so they can quote you what it will cost to fix it. You can then submit this to the owner if you plan on renegotiating the sale price. If you want to learn more about due diligence, check out episode SS161.

Hopefully, by following these strategies, you can avoid common pitfalls many rental property investors make.

Transcript:

Charles:
Are you overpaying for your rental property without even realizing it? Imagine discovering months after a purchase that you could have saved thousands if you’d bought it a little differently. I spent the last two decades analyzing deals, buying properties, and working with top real estate investors to determine exactly what separates the good buys from the Great Buys. If you don’t buy right, you could lose thousands before you even start. And I’m here to help make sure that never happens. So welcome to Strategy Saturday. I’m Charles Carillo and in this episode we’re discussing the essential strategies for avoiding overpaying for your rental property. How well you purchase a property will determine its profitability. And believe it or not, your profit is determined before the property even closes. So stay tuned because by the end of this episode you’ll know exactly what to look for to make smarter, more profitable real estate investments.

Charles:
You make your money when you buy is a famous real estate investing phrase that perfectly fits with the topic of this episode. How well you purchase the property will determine the profitability of the deal. In other words, the profit is determined before the property closes, not during the ownership period. When I look back on previous deals that I have done, both okay ones and very good ones, I believe a few things have made the difference between the two. Number one is understanding the market and the submarkets. When I’ve done this, I’ve done much better. So for example, the largest MSA metropolitan statistical area in the United States is New York Newark. Okay? Still several submarkets within this MSA can differ widely including Manhattan, Brooklyn, the Bronx, Newark, et cetera. So knowing the market’s number one, but then also understanding the submarket is also very important. So what makes for a good market are submarket, I would say population growth, income and job growth, employment and job diversity and landlord friendliness.

Charles:
Number two is we kind drill down a little bit and you’re understanding the specific neighborhoods where you’re looking at investing. So looking at the income maps, you can precisely see where the neighborhoods change regarding income. Usually these areas are separated by a highway or a busy street or a train track or some sort of body of water. But understanding the income of an area will allow you to understand the potential a property quickly has. Now, if an area’s meeting income, let’s say is $30,000, and your business plan is to increase rents where they currently are at 800 a month to say 1200 a month, if that will price out the current population since it’s more than one third of their income. So even if they did want to pay that you’re probably not going to approve them because we work by that whole whole strategy of it’s only one third of someone’s income that they can pay for rent during our underwriting process.

Charles:
So it’s not gonna work. You’d have to go into an area that is more expensive to do that kind of renovation or where income is higher or you’d have to do less renovation. Now, if you’re serious about purchasing a property in specific neighborhoods, you or someone entrusted on your team needs to actually drive them. And you can utilize technology to find current rents, sale prices in the status properties on the market. But you need to know the area. You need to see the area review the comparables that you are reviewing ’cause you might just pick out some comparables. But if you plan renovating units and raising rents to match another property in an area, go to that property mystery shop it, okay? It’ll give you the most accurate idea of what a property requires to achieve those rents in that area, and you can now adjust your underwriting accordingly.

Charles:
The main list here is that neighborhoods change usually fast, and the subject property a quarter mile from a comparable you found online might not be accurate, comparable for you to use. And additionally, your potential tenants will visit the property before renting you and they’ll notice the property in the surrounding area before they even arrive for the tour. And they’re gonna notice it every day on the way in and out of the property. And maybe you got ’em for one year, but you’re probably not gonna get them on a renewal if the area, if they’re paying too much for the area that they’re rent. Number three is thorough due diligence. And I’m not gonna go through the entire due diligence process, but there are a few main areas where I usually see investors kind of cut corners. And the first part is the financial audit.

Charles:
So before you make an offer, you should have reviewed the financials and confirmed that you can renovate the property, increase rent, and increase the net operating income. Okay? However, during due diligence, we’re now verifying the accuracy of those financials. So do the deposits match up with the bank statements? Do the expenses on the financials match the bills that you provided to you from the seller? And are all the property expenses accounted for or are you missing some? Are there any other irregularities? So if you have something in here, you’re seeing that landscaping is this much, that’s what it’s supposed to be, but you look onto the financial statement from the seller and there’s no, there’s no landscaping mentioned, that’s an issue. That’s something you’re gonna have to pay for. Most likely they are paying cash for it or they are running it through another property of theirs, and it’s not on that property that you’re buying financials.

Charles:
So these are important things because it can screw up what you are paying for a property, the value of the property, ’cause it’s actually less. Now. The second is the lease audit. So run each tenant through a state search to see if they have been evicted. How complete is a tenant’s application package? If it’s very like put together really well, all the information there, I’m gonna feel a lot more, a lot better about it. They did like a thorough underwriting. And how long have the tenants lived there for? Many new leases in like the last 30 to 90 days always make me a little nervous since the seller might have just rented to anyone to improve the property’s financials. And this tends to lead to evictions being much more expensive. I’d rather buy the property with more vacancies than buy a property that’s been really stuffed with tenants that really don’t match with the correct underwriting that should be done.

Charles:
Now, the third is the physical inspection or the unit walkthrough. And don’t be afraid to hire a property inspector and additional contractors to perform the unit walkthrough. If you are a new investor, maybe you pay a contractor to initially tour the property with you before making offer and minor issues on the service might lead to call sea repairs down the road. And it’s essential to hire professionals to walk every unit in addition to reviewing all the major aspects of a property, including the roof, plumbing, the drains HVAC systems, et cetera. If there is an issue, the contractor is already there so they can quote you and what they’ll need to fix it. You can then submit this to the owner if you plan on renegotiating the sale price. If you wanna learn more about due diligence, checkout episode SS 1 61 and that’s SS 1 61.

Charles:
Where I really break that down. And this is the whole thing with the physical inspections, which I see people kind of cutting corners on, is that you’re spending, you’re gonna be buying a property spending hundreds of thousands, maybe millions of dollars on a property, and you know, people get cheap when they’re not bringing out inspectors. Bring out all the inspectors you can, maybe even two for each one for every type of system. If you don’t trust someone’s kind of advice that they’ve given you before or that they’re telling you on the phone, maybe you bring someone out as well. It’s, it’s not gonna be wasted, okay? Especially if you’re getting to the point where your money is going, gonna be going hard soon and non refundable is by mean. It’s important to know what you’re buying and to make sure that you’re aware of a hundred percent what you’re getting yourself into. Hopefully by following these strategies, you can avoid common pitfalls many rental property investors make. And please remember to rate, review, subscribe, some common, some potential show topics at globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndicationsuperstars.com. Look forward to two more episodes next week. See you then.

Links Mentioned In The Episode:

Are You a Fan? Subscribe, Rate, Review & Share – Click Here To Learn How

What question do you always wish I would ask but I never do?

Connect with the Global Investors Show, Charles Carillo and Harborside Partners:

Scroll to top