Collecting the Data You Need to Make a Wiser Real Estate Investment Decision

The ultimate investment decision you make as to whether or not you will purchase a rental property requires a serious number crunching session with calculations that measure the property's financial performance. Yet, you can't start making calculations or projections without collecting some raw data related to the property and market first.

Here are some general guidelines that may help you.

Property Data

The idea here is to validate the accuracy of the income and expenses you must consider later to make a prudent investment decision. Bear in mind that real estate investors purchase an investment property's cash flow (or income stream). Therefore it is incumbent upon you to be sure that the numbers you rely on later to calculate cash flow (income less expenses) are truthful and correct.

The Leases and Rental Agreements You will become subject to the terms of the leases and rental agreements if you do buy the property and therefore must examine them closely. What do they say about rental rates, renewal options, and termination? How long does each lease run? Do they agree with the seller's representation so you can count on the current figures to make forecasts about the property's future performance?

The Property Tax Bill Looking at the property's tax bill will provide you with several bits of helpful information. You can confirm the accuracy of this expense plus determine whether some sort of tax abatement was granted to the current owner that might expire or not apply to you as the new owner.

The Utility Bills It is not a bad idea to spot-check what the owner has been paying for gas, electric, and water (sometimes includes sewer) to run the income property. Most utility companies will give you usage information if you call, and the information can be a useful way to discover discrepancies in the property's operating expenses.

The Seller's Schedule E Tax Return Seller's typically will not release this personal information without an accepted offer so be sure to include a request to see the Schedule E in your offer. This information is helpful because you see the income and expenses the seller has been reporting about the property to the IRS. You might want to request the returns for the previous two or three years.

Market Data

Understanding as much as possible about the conditions of the real estate market surrounding the rental property you want to purchase is a necessary and prudent approach to real estate investing.

Comparable Sales Conducting a survey to see what other similar income property's have recently sold for is a proven way to evaluate whether a seller's asking price is in line with realistic property value. To make it meaningful, however, keep the sold comparables as recent as possible (perhaps within the past six months to one year), and the properties themselves as comparable as possible. You want to look at rental properties similar in usage, location, size, and condition to the rental property you are considering. Real estate agents are generally prepared to do this for you, or you can conduct your own survey by researching the public records at local tax assessor's office or making a call to several real estate appraisers. Comparable sales should not determine your final investment decision because it is normally impossible to find exact comparables within income-producing properties, but they will give you a useful feel of the market that can help you define your investment decision.

Rental Rates and Expenses Knowing what tenants are willing to pay for space and owners are obliged to pay for operating expenses in the surrounding area for similar kinds of rental property is valuable information. Again, you can turn to a real estate professional or appraiser, but also consider calling a property management company. They have firsthand knowledge of rents and expenses, and if you are sincere about needing their services later, they might share that information with you.

Capitalization Rates Knowing what the typical capitalization rate is for a particular kind of property inside a market area is helpful, but there is a caveat. Capitalization rates are derived from income and expense figures taken from investment properties sold in the area. The actual income and expenses, however, are known only to the seller and buyer, perhaps two real estate agents, and an appraiser. Outside that, a property's income and expense figures are merely assumed for the cap rate calculation. If you plan to rely strictly on the local cap rate to make your investment decision just be sure it reflects real numbers. In this case, work with a knowledgeable real estate agent or speak to an appraiser.

Okay, once you have the property and market information you need for a meaningful property analysis, get started. You are now better prepared to dig into and crunch some real numbers required for your investment decision.

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