Buying an Investment Property? Here's What We Look at Before You Buy

Buying an investment property is different from buying a home you plan to live in.

Of course, you still want a property in a good location with a floor plan people will enjoy. But when the goal is investment, there is another layer to the decision.

The numbers need to make sense.

The rental market needs to make sense.

The HOA needs to make sense.

And perhaps most importantly, the property needs to make sense not only today, but years from now.

That is why when an investor sends us a property they are considering, we look at much more than the listing.

We Start With Your Goal

Before deciding whether a property is a good investment, we need to understand what you want the investment to do.

Are you looking primarily for monthly income?

Long-term appreciation?

A property you can rent now and possibly use yourself someday?

Something your children or family might use?

A combination of investment and personal use?

There isn't one investment property that is right for everyone.

Once we understand the goal, we can start looking for the right property.

We Look at What Similar Homes Actually Sold For

Just because a property is listed for $900,000 doesn't mean it is worth $900,000.

We look at recent comparable sales and dig deeper than the price.

How large were they?

What condition were they in?

Did they have the same number of bedrooms?

Garage?

Lot?

Location within the community?

Were they remodeled?

Were there features that made buyers willing to pay more or less?

This helps us understand what buyers have actually been willing to pay, rather than simply relying on an asking price or an online estimate.

Then We Research the Rental Market

This is one of the most important parts.

We don't want to know only what someone is asking for rent.

We want to know what comparable properties have actually leased for.

We look at recent leases, active rentals, days on market, price reductions, condition, floor plans, parking, garages, amenities and location.

If five similar properties are sitting on the market at $5,000 per month while the ones actually leasing are closer to $4,500, that tells us something.

A rental estimate needs to be realistic because the entire investment analysis depends on it.

We Look at the Competition

What else could a tenant rent for the same amount of money?

This is easy to overlook.

If your property would need to rent for $5,000 per month to make the numbers work, we want to see what a tenant can get for $5,000 nearby.

Maybe there is a newer property.

Maybe another community offers better amenities.

Maybe another rental has a two-car garage instead of one.

Maybe your property has something the others don't.

We want to understand where the property fits within the rental market before you own it.

We Run the Numbers

Rent is only one side of the equation.

We also consider:

Mortgage payment

Property taxes

Insurance

HOA dues

Special assessments

Maintenance

Vacancy

Property management, if applicable

Utilities the owner may be responsible for

Initial repairs or improvements

Then we compare the estimated income with the estimated cost of ownership.

Sometimes the result is positive monthly cash flow.

Sometimes it isn't.

That doesn't automatically make the property a bad investment, especially in a market like Orange County where some investors are placing greater emphasis on long-term appreciation.

But you should understand that tradeoff before you buy.

We Stress Test It

We also like to ask a few less exciting questions.

What happens if the rent is lower than expected?

What if the property sits vacant for a month?

What if the HOA increases?

What if the HVAC needs to be replaced?

What if there is an unexpected $7,500 repair during the first year?

If an investment only works when absolutely everything goes right, we want to know that before you own it.

We Read the HOA Documents

For condos and townhomes, this can be huge.

A beautiful property at the right price can become the wrong investment if the HOA doesn't allow you to use it the way you intended.

We look for things such as:

Rental restrictions

Rental caps

Minimum lease periods

Waiting periods before renting

Special assessments

HOA reserves

Insurance information

Pending litigation

Owner responsibilities

We don't assume a property can be rented simply because another unit in the community is currently being rented.

We verify.

We Think Like a Future Tenant

This is where spreadsheets don't tell the whole story.

When we walk through the property, we ask:

Would someone want to live here?

Is there enough storage?

Where do they park?

Is there a garage?

Is there in-unit laundry?

Does the floor plan work?

Is there outdoor space?

How is the natural light?

Are the bedrooms functional?

How convenient is the location?

What does the community offer?

A tenant doesn't rent a spreadsheet.

They rent a home.

We Think About Schools, Location and Convenience

Depending on the property, we research objective information that could be important to future tenants and buyers.

That may include:

Assigned schools and published ratings

Distance to employment centers

Shopping and groceries

Parks and recreation

Freeway access

Community amenities

Nearby services

We provide the information so you can understand the property's location and potential demand.

We Look at the Property Through an Inspector's Eyes

An investment property isn't only about what it earns.

It is also about what it may cost you.

During due diligence, we want to understand the condition of major components such as HVAC, plumbing, electrical, roof, water heater, appliances, windows and other systems.

An older HVAC system may not stop us from buying a property.

But we would rather know about it before closing than six months afterward.

We Think About Resale Before You Buy

This may be one of the most overlooked parts of investment property analysis.

Someday, you may sell.

So before buying, we ask:

What will the next buyer think about this property?

Is the floor plan broadly appealing?

Is parking an issue?

Is the HOA unusually high?

Is the location desirable?

Is there something unusual about the property that could limit the future buyer pool?

A property can be a rental today and a resale tomorrow.

We want to think about both.

We Help Build the Team Around the Investment

There are also questions that shouldn't be answered by your real estate agents.

How should you take title?

Should you own the property personally, in a trust or through an LLC?

What are the tax implications?

How does depreciation apply?

Could a 1031 exchange eventually make sense?

What type of insurance should you carry?

Those are conversations for the appropriate CPA, attorney, lender and insurance professional.

Our role is to recognize when those questions need to be asked and help make sure they don't get overlooked.

Behind the Scenes

This is the part most buyers never see.

Someone may text us an address and say:

"Would this make a good investment?"

Before answering, we may be looking at recent sales, leased properties, current rental competition, HOA information, taxes, assessments, property history, days on market, price changes, floor plans, location and the numbers.

Because "I like this property" and "this is a good investment" are two very different things.

Sometimes our answer is:

"This deserves a closer look."

Sometimes it's:

"The numbers aren't as good as they first appear."

And sometimes we find another property that makes much more sense.

That is exactly what we are there to help you figure out.

We Built Something to Help

After having more and more conversations with clients about investment properties, we decided to put much of what we discuss into one place.

Our Investment Property Guide walks through the process from beginning to end, including financing, cash flow, rental analysis, HOA considerations, inspections, taxes, property management and long-term ownership.

We even created tools to help you run the numbers, stress test a property and compare different investment opportunities.

And if you find a property you're considering, you can send it directly to us for a closer look.

Explore Our Investment Property Guide

The Bottom Line

You don't have to become a real estate investor, property manager, appraiser, lender and tax expert all at once.

You just need to understand what you're buying and have the right people helping you ask the right questions.

Before you fall in love with an investment property, let's find out whether the investment makes sense.