When it comes to investing in rental properties you will often hear me preach running the numbers on a property.
It makes sense to only pursue properties that will provide the cash on cash or cap rate we desire. The thing is – we don’t live in a math equation. We live in the real world that has a bunch of variables that can impact the numbers.
That is why I’d like to talk about some factors that exist behind the numbers.
Rental Property Investing: Behind the Numbers
When running numbers one of the main things driving the result is rent. How much rent will a property bring in and how consistent is that rent?
Knowing the neighborhood
You can find 15% cash on cash return on paper all day in war zone neighborhoods. The question is – will you be able to collect rent? How much vacancy will there be? Will you have to do evictions regularly?
If the rent isn’t coming in it doesn’t matter how great the numbers look.
This isn’t to say you cannot being successful investing in any class of neighborhood, people do it. You should however factor in the reality of the area into your numbers.
Allocating one month for vacancy may not get in done in an area with low demand and high turnover.
This is why I like to focus on areas with the following characteristics:
- Affordable rents with room to increase
- Is the neighborhood a place someone would raise a family
- Do local residents like the schools
- Is there any economic development going on
There other things you should have already looked, such as crime rate, income levels etc. but the above items are some of the more nuanced ones I focus on.
By doing this it keeps me in situations where I can expect one month’s vacancy to be the most I’ll likely deal with. I personally love investing in towns that are next to the cities that people are being priced out of.
Where do you think renters move? That’s right, usually to the next closest town due to where their job is.
This can also affect the demand for a property. If you have a duplex with two one bedroom units in an area that is heavily populated by families, then are you really prime position for that area?
I’m not saying it would definitely be a bad investment, there are single people and young couples everywhere. However, if you own a duplex that consists of two bed apartments you are prime picking for starter families in an area new families are moving too.
Plus, new families tend to stay a while, becoming long-term tenants until they maybe move on and buy their own home in that area.
The age of a property and its capital expenditure (capex) items can impact your numbers as well. If a property has a 20 year old roof that you do not plan to replace up front, then a standard 5% allocation of rents toward capex may not get it done. It’s likely that roof will need replacing sometime in near future so one needs to allocate for that.
You can use that example for other items like boilers, HVAC, etc.
Paying mind to the minutiae
These little things adds up when it comes to investing success. We want to give our investments the best chance to succeed. So when running the numbers be sure you have a feel for the items behind them.
For a full breakdown of running the numbers, screening tenants and getting a property rent ready check out the ScaredyCatGuide to Investing in Rental Properties video course.