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Five Ways to Know that You’ve Found a Great Investment Property

Great Investment Property ChecklistAfter our reviewing the responses to our October newsletter reader survey (thanks for participating!!), we found that next to financing your real estate investment, the next most important thing you want to know about is how to find (or know you’ve found) a great investment property. So, I’m going to take you through what I call the 5 Ah Ha’s of finding a good investment property. I call them Ah Ha’s because you will go “Ah Ha!” when you find a property with each of these features!

Ah Ha 1: It meets your objectives
Making decisions based on your real estate investing objectives is the foundation of our strategy, so it makes sense that the first AH HA is that the property meets your objectives.

For example, if your objective is to make $200 per month in positive cashflow you need to go out and find a property that will produce the money! Usually, it’s easier to obtain positive cashflow from a multi-unit property. It could be a house with a basement suite (2 tenants – 2 rents), a duplex, a tri-plex, or a small apartment building with 4 or more units. One of the easiest and quickest ways to determine if it will cashflow is using the Gross Rent Multiplier or GRM.

To Calculate the GRM
Asking/Purchase price = $150,000
Monthly rent = $1,100
$150,000/($1,100 x 12) = 11.36 (GRM).

Speaking generally, a property with a GRM of approximately 10 or less will likely produce neutral or possibly positive cashflow. And this is just a “quick and dirty” way to determine if a property will cashflow (you can read more here). You can search through realtor.com or realtor.ca to find potential properties and some will include current rents. These rents you can apply to the GRM formula above to quickly check where the GRM sits. If it’s well above 15, you will not be positively cashflowing. If the listing does not show rents, you will need to do some additional research to find out the approximate rents for properties/units of that size, type, and location. Use rentometer, viewit, or craigslist to do some comparative research (these can all be found in our Resources page).

Ah Ha 2: It’s in a Growing market
Ok – so the property meets your objective. The next thing to check is that the market is growing. We’ve talked about this a bit before, but searching the local papers for news about new jobs entering the market (either a new company moving in, lots of new construction or corporate expansions), learning of new plans for infrastructure (public transit lines or major roadways being added) as well as getting some sense of population shifts are all good things to do to make sure you’re investing in a growing market.

Government websites are also a pretty good source of information about the area (although the data is usually a year or two old). Check municipal and city websites along with provincial or state websites and look for census information including population, household income, number of children, number of schools, number of households, average person per household, etc. The information you really want to see is the direction these numbers are trending in. Is the area growing or shrinking or fairly stable? If the trending shows it’s growing, you’ve likely found another Ah Ha!!

Ah Ha 3: The area is improving or recently improved
Your objectives will be very relevant to whether you find a good area or one in transition. If you want a no mess, no fuss type of property you are likely looking for an established area. But if you want to chase some potential appreciation or can’t afford the established areas yet, you might be looking for a neighbourhood that is still having some “growing pains”.

No matter what your objective, we wouldn’t advise buying in the crappy area if it has no signs of hope. Bad areas attract difficult tenants and your property will likely go down in value and be impossible to sell later on. Instead, seek an area that is improving (have no idea where to look? Julie likes to follow the new Starbucks locations). In these new Starbucks locations, you will often see plenty of signs of improvement… people renovating homes, cleaning up yards, government investment in roads and parks and developers buying land are just a few.

Another word of caution, just because the area appears to be improving, does not guarantee that you will make money buying a property there. However, if you’ve done your research on the economy, vacancy rates, population changes and negotiate well, you will likely have an AH HA property.

Ah Ha 4: You find a professional Property Manager that is willing to manage your prospective building
Owning an investment property does not mean you HAVE to have a property manager. In fact, we don’t always hire one. But the properties where we have professional property management in place are less stressful and much less time consuming for us. A good property manager will cost you around 10% of your gross rent and even up to 1 full month’s rent to place a tenant in your property, but unless you want to buy yourself a part time job when you buy your property, a good property manager is worth every penny.

The key to this AH HA is to locate a property manager BEFORE you buy the investment property. Even if you decide you want to save some cash and just manage it yourself, it would be wise to speak with a few PM’s to find out if they would manage your property, determine what their fees are, and what their fees pay for! Why do you look for a PM even if you are going to manage it yourself? Well, if down the road you accumulate too many to manage or you can’t take the stress of managing it anymore or you start to enjoy your time down in Mexico for 2 months per year and don’t want to have to always answer your tenants phone calls… you will want to know that you can hire a reputable property manager to take over for you!

Don’t assume there will be one waiting when you are looking! The best way to find out about Property Managers is to ask around. Speak to realtors, lawyers, accountants in the area you want to invest in, and ask for their recommendations. You can also search in the Yellow Pages or online. The key is to do reference checks by speaking with other individuals who are working with the prospective manager. Want to learn what to watch out for? Check out our article on Five Ways to Protect Yourself from a Bad Property Manager.

Ah Ha 5: The vacancy rate in the area is dropping and/or is sub 5%
Our last Ah Ha is really geared towards the long-term holder of real estate. This type of investor buys with the intention of renting the property out for a fairly long period of time. Having a low or dropping vacancy rate is very important to help keep your place rented (high demand, low supply), and it also will help your cashflow and improve your bank financing.

Sure, you can buy a cashflowing property with a GRM of 5.5, but what if it’s in an area with a vacancy rate of 25%? We have had some Rev N You readers ask about investing in places like Prince Rupert or Kitimat, BC or Windsor, Ontario. Well, a quick look at CMHC’s reports and you’ll see that the vacancy rates are 14.3%, 23.2%, and 13.2%, respectively in those areas. As a long-term investor, you have to try to discern whether those vacancy rates will continue to be that high or will they drop in the not too distant future? If you don’t see a drop in the vacancy rates coming very soon, then I would stay away from that area (at least until the rate drops well below 10%). At the end of the day, you want to hold properties where the demand for rental units is strong. You’ll experience less vacancy and better rent rates.

PublishedNovember 7, 2008

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