This next step in my journey was deciding on an investment property. I finally pulled the trigger on a trip to see some nearby properties. The trip cost me a bit of “husband capital” since I was gone for several hours on a Saturday. It was worth it though because the trip ended up being fruitful!
Property Analysis
In a previous post I covered how I analyze investment properties. I spent several weekends over the span of several months analyzing properties after the kids went to bed. It helped me get to know and understand several areas and trends in a city about an hour away. I finally found something I liked. I called up my agent and luckily he was available the next day. We were able to set up showings for the property I had my eye on as well as a couple of others I thought could be interesting.
I wanted to see the properties in person to not only see the house with my own eyes, but to get a feel for the neighborhoods. Those pictures real estate specialists take now are pretty incredible, and can hide flaws. They also aren’t going to photograph that hole in the floor or a water-stained ceiling. There is also often no way to see if the next door neighbor has a boat and an RV jammed in the driveway with laundry hanging out the windows.
I didn’t go into the showings expecting or needing a perfectly maintained property, but rather to understand what I might need to spend to get it ready to rent.
The Three Houses
I wanted to make my trip to the area effective, and I did see some other properties that looked interesting. Checking out a few others helped me compare neighborhoods and price ranges. I looked at the properties below, listed in order:
Property #1
I put together the whole trip to see this first property. There is a potential bias called “anchoring,” where you make the decision before you have all available information. Maybe the best way to describe it is, you set your heart on something and go for it no matter what. There is a cool article on Harvard’s Blog describing the phenomenon, though it is more geared toward negotiating. I did my best to hold “anchoring” at bay.
The seller’s agent was there holding an open house, even though we had to make an appointment. We walked around while he worked at the kitchen table and a few other people toured the property. It was nice! Some of the carpet was pretty beat up, and someone had definitely used a non-matched touch up paint on some parts of the walls, but the bones and most of the finishes were great.
The neighborhood was a positive. It was somewhat cookie cutter because most houses used the same finishes and were probably built by the same builder. However, those finishes were all nice. In other words the quality of the neighborhood should hold up for a while. The houses were fairly close together, and the yard, especially on this property was small. However, that’s not always a bad thing as there are plenty of tenants who would rather not mow a gigantic yard.
Property #2
The second property was a bit smaller and less expensive. The rent potential was reasonable, but probably not as high (relative to price) as the first property. The house itself was not as nice as the first one, but was in line for the neighborhood and rent level of the area. The back fence looked like it maybe had one more year to go, and there was nice new flooring in one of the guest bedrooms that stopped and was unfinished at the closet.
The neighborhood was the real deal-breaker. The surrounding houses had very little character and several yards were not well maintained. My agent, who rents and manages his own properties, looked around and said he wouldn’t want to own in the neighborhood because he felt it had limited appreciation potential relative to a nicer neighborhood.
Property #3
The third property was a real contender. It was the cheapest of the homes we looked at, and would have fallen below my set goal of a home above the median price for the area. It was a bit smaller and backed up to a road, but the neighborhood was in good shape.
The home had nice finishes throughout. Though it would have brought in less rent than the others, it was also priced very reasonably. It was in good shape except for some Hardie board issues around the foundation. Somebody used nails instead of screws on the Hardie plank and some of them were coming up.
Unfortunately in this market, a reasonable price for an in shape property meant there were already several offers. It later ended up selling for about $15k more than ask, which was a pretty hefty percentage of the asking price.
I ultimately decided against pursuing this home because it didn’t quite meet my goals and because profitability would have been similar to or below the first property I looked at. The multiple offers was also off-putting considering an increase in price would put my target profitability out of reach.
Deciding on an Investment Property
We spent about 30 minutes at each home on our tour. By the time we had walked around the third property, we spent the last five minutes discussing an offer on the first property. It has a nice neighborhood, should attract quality renters, didn’t need a ton of TLC based on a quick eyeballing, and had some good rent and return potential based on price. Based on my analysis (you can use my spreadsheet template), depending on rent it looked like a cap rate of 5.5 to 6% and CoC of 6 to 8.5% with 25% down payment.
Because it was a seller’s market, we decided on a full-priced offer. We expected that this offer would be enough to get us to the negotiating table. The seller’s agent said there were already offers on the home and they expected to decide the next day. Before driving home, we agreed to put in an offer by that evening or early the next morning.
The Next Steps
That is how I went about deciding on an investment property! The next steps are the offer and negotiation, including my experience with inspection and re-negotiation (hint, I got the contract!). I will give you all the details soon.
