Case Study: Assessing A Rental Property
How Do You Assess A Rental Property?
I get this question all the time. People are always asking me: How do you assess a rental property?
How do you look at a property that you would like to make a rental or you think you might potentially want to make a rental property?
And I thought, well, what’s a better way than let’s just go take a look at one. Here we are going to look at a property that we’re currently renovating, we know it’s going to be a rental. So how do we look at this particular project?
Click On The Video If You Would Rather Watch Than Read:
First Things First
First thing, let’s take a look at our neighborhood and we ran our comps. We need to know what the value of this house will be after we have repaired it(ARV).
So what was the value of this house? Once we fixed it up to the market standard, what do we think it would be worth? This particular house, probably right about $100,000.
And then, we’re also going to look at the market rent? Different neighborhoods obviously have different market rents in any city.
We are looking at a two-bedroom, one bath and in this neighborhood, it’s probably going to rent for $850-900. So we know what our numbers are.
And then we’re going to look at, well, how much are we going to pay for the house? And then how much repair does it need? Looking at this house, it wasn’t a tough project. It wasn’t in really rough shape. We’re about 80% done with it at this time, and we’ll just take a look at it. See some of the things that we know we had to fix and some of the stuff that we’ve still got to fix and see if that helps answer that question about how we’re taking a look at these rental properties.
This is where we started walking the property in the video.
First things first, we want to always make sure that everything’s safe. We’re going to change the locks on every single property. Almost everybody knows that, but let’s think about some of the other things that we talked about as far as being safe.
Do we have all of our smoke detectors, we’re going to put some new ones in there. What else do we have checked out? We had an electrician come by, just to make sure everything looked good, everything looked safe, and address anything that they saw.
We had the plumber come by, check for leaks, check for any red flags, along with complete the work that they need to do.
How Much To Fix?
Now, this is not the most expensive property in the neighborhood, it’s not going to be the most expensive rental in the neighborhood.
So we need to fix it up a little better than what most of the other rentals are going for around here, but not so much that we go broke. And that way our property will always be rented.
We added some fans, not a huge expense, but much nicer than the little lights that they had in here. We textured, painted, fixed all the sheetrock that was in here.
A couple of little tips: They had this stove here, and the stove was just kind of floating out by itself. Added one cabinet and a vent hood. Imagine if you’re cooking dinner all the time, there’s no way to get rid of any of that smoke that’s in there other than opening up the window. It just gives you a much better layout to the kitchen and makes it more functional. It’s going to keep your house and your kitchen much cleaner as well.
It had all those really old tile countertops. It was all busted up in here. Put in a laminate countertop. Obviously, the work’s not totally done here. You can see the blue tape and you can see things that are quite done.
One additional tip that I’ll tell you is, if you guys have ever seen where they have the old faucet that comes straight out of the wall, this has already been patched and repaired and we moved it. We always change those. They are notorious for leaking. If you haven’t seen one, you will. It comes straight out, usually, those are straight plumbed in. Notorious for having leaks and they cause additional problems. In my opinion, better just to take it out, put in something more standard.
We went ahead and put ceiling fans in all the bedrooms that just had some lights. And then just your basic, paint, texture, drywall throughout this property.
There’s blue tape everywhere. So like I said, we’re not all the way done. We’re putting in some new bathroom lights. A lot of this tile is still good, but it needs to be cleaned up. See a lot of these things in here can be scraped off and re-calked, and they will look much, much nicer, and then our paint. Still supposed to get another cabinet in here with another faucet that did not make it. So we’ll get that part done.
Another thing that we like to do on all the rental properties, is go ahead and have them snake the drain, the sewer line. We don’t know if there’s anything’s clogged up in here. Well, it’s much better, it’s not expensive just to get that knocked out. So we just started making it a habit. Anytime the plumber comes in, anytime we got a new property, hey, snake it all the way. Make sure we don’t any clogs or blockages.
Instead of having the people come in having a problem, then you already have people in the property. So definitely worth thinking about.
Brought you out for another key learning in here(went outside). Hopefully, you can see this. We got pretty lucky on this one because this water heater has already been replaced, and it looks in great shape.
But when you see those water heaters that are 18, 20 years old, it’s probably going to be a problem. You got to make sure you have hot water. If they’re that old, I’ll go ahead and replace them right out of the gate because they always become a problem. And then you’ve got a tenant in there. They don’t have hot water, not a good situation.
Other things that we did here, it is pouring down rain. So we’re not going to spend too much time on the outside, but roofer got up there and took a look at it. What’d he say? He said, “Hey, this roof is not fantastic, but you’ve got a few more years. I don’t see anywhere that it’s leaking.” We can’t see inside anywhere that it’s leaking, so we’re going to leave that there and try to get a little more life out of it.
Other than that, we’re just going to finish up the rest of this here project. Let’s go back to the office and put some numbers together, take a look at how everything’s going to shake out, and then we’ll see what you think.
Went back to the office.
Now that we’re back in the office and we’re out of the rain, let’s talk about that property a little bit, talk about a couple of the numbers and see what we think.
What do we like about that property? The price was reasonable. We feel comfortable with that neighborhood. We know that people like to rent houses in that neighborhood, so we feel confident that we will be able to get it rented. And we have some other rental property in that same area, so we’ve got some quality tenants. So we feel comfortable with tenants that we’re going to put in our property.
That part all sounds good. We checked our after repair value(ARV). Once we fix it up, we’ve got a pretty good idea of what it’s going to be worth. And we’ve also checked our rent, so we feel good about that part.
The other thing we liked about this particular house, it wasn’t a really big rehab. We don’t have a problem buying properties that need a big rehab. That’s not the big deal, but less rehab is attractive because we’re spending less money, duh…
But also, we can turn that project around much faster, get a tenant in much faster. And now, that property is making money for us a lot faster than if we have a three, four, or five-month rehab.
So this property without fixing the roof, realistically, let’s call the ARV $95,000. Our purchase price with the closing costs at the end of the day when it shook out, was $58,400. So when we added up our GC, right? So that was the guy doing all our paint, sheetrock, et cetera, general work.
Plus, we had the plumber come through there. We had the electrician come through there. We had to buy some materials. We’ve got insurance, we’ve got utilities, had to buy some appliances, going to have to get the property cleaned up. In total, it’s about $9,800 for that.
So when you take your $58,400 plus you for $9,800 to spend on the property, you’re going to end up with $68,200. We know that our bank will let us re-fi 75% of the appraisal value of the property on a rental property.
When we look at this one, then we take our $95,000 times 0.75. It gives a $71,250. But we also have to factor in that 75 count includes the closing costs for refinancing it, so really it’s closer to 73%. So we’re trying to stay under that number if we can to leave less money sitting in the property. If you do it at 73, then you’re $69,350. If we have $68,200 in the property, we feel pretty good about this being a quality deal.
Make A Win-Win-Win-Win
Person who sold it, super happy that they were able to sell it to us. We’ve got another rental property put in the portfolio, so we’re happy. Contractors were happy because they got some more work to do. And hopefully, we’ll a tenant in there real soon, and they’ll be happy.
I hope this helps. If you guys like it, let me know. If there are things that you think we could answer that we can do better, feel free to let us know that as well. And if not, we’ll talk to you soon. Thank you!