In part one of my series, we met Adam, who desires to purchase a house to live in instead of renting.
In this article, you will meet Nathan, who sees the potential for future wealth investment real estate offers. Nathan is motivated to acquire a residential investment property but does not know where to start.
Let’s look at Nathan’s steps to purchase his first investment property.
Deciding to invest
Real estate investing is an illiquid investment. You can not quickly “cash out” and get your money from an investment. A sale of a property takes time and could have tax ramifications.
In most cases, it will take a sizable amount of cash for a down payment as lenders look for 25 percent of the purchase price as a rule of thumb. The down-payment could be less in pursuing a single-family home and more with other real estate types such as industrial or office.
Consider your options
The type of property desired will start the direction Nathan should proceed. A house, duplex, triplex, and fourplex are considered single-family residential. A residential real estate agent is a good source for these properties.
Commercial real estate is multi-family (five or more units) residential, industrial, office, and retail properties. A commercial real estate broker is best to assist Nathan. At the same time, financing is more difficult to obtain as lenders and requirements are different than residential.
The location desired is critical; we will discuss this in the analysis section, but Nathan is looking all over the nation for a property. The area should be somewhere he enjoys going as he will be there often.
I highly recommend hiring a property manager for any residential property, and it is a good idea for most properties. There are many advantages to having someone being the go-between the landlord and tenant, especially when rent issues arise.
Analysis — it’s more than just the property
I explained to Nathan my four-tiered approach to investment property analysis. Each tier builds onto the next.
Location
An investor cannot change the aspects of the location. First, perform as much due diligence online and on the phone as possible, especially if you need to get on a plane to the site. If all is well, then after looking at the other tiers, schedule a site visit.
The area should have the right economic indicators to show it is growing in the sectors that the property fits: jobs, industry, and demographics. The location should be considered, such as proximity to transit and physical characteristics such as weather.
Financial Picture
The next step is to review the financial picture. The broker listing the property will probably provide a “proforma” financial report in the marketing package. This report represents the potential of the property for a best-case scenario. Nathan needs to analyze using actual data and a realistic plan upon ownership.
Property Condition
The condition of the property will have a role to play in the financial picture as there may be deferred maintenance and the need for capital improvements. The condition will be apparent after a site visit and inspection by qualified vendors for each specific system.
Tenants and lease structure
A fourplex with four month-to-month tenants can easily see a change in tenancy if Nathan warrants that the property would be significantly improved by re-tenanting. However, a single-tenant retail property with a 20-year lease will take a different approach.
A lease can be in place for many years, so it is crucial to know your current tenant population and the terms in a 30-page lease you will be using for the next 25 years.
Nathan continues to learn what to look for as he continues his search with my guidance.
Burt M. Polson, CCIM, is the broker of ACRESinfo.com, a commercial real estate brokerage company specializing in sales, leasing, and property management. Call him at (707) 254–8000 or email burt@acresinfo.com.
