3) Deal Analysis

Location: Even if you pick a great city and neighborhood, the precise location of the home matters as well. Most tenants prefer quiet residential blocks and streets. You may want to avoid purchasing homes at busy intersections or near loud highways, businesses, or venues. Also consider the topography of the land. Homes at the bottom of a valley may have water drainage problems, while those on a steep slope may have foundation problems.

Property Type: Single family 1-4 units, but not condos.

Minimum Rent: Look for properties that can rent out at least $750/mo. 

Year Built: I avoid homes older than 50-60 years, so if it was built before 1950, I will likely skip over it. Older homes will almost always have more ongoing maintenance issues, regardless of how good the rehab was. Additionally, older properties may have used poor or unsafe construction materials (like asbestos), which you may have to replace. Also note if the property is a newly constructed home. Newer homes seem better but the neighborhood much not be undeveloped and not stable during the next recession.

Beds/Baths: Different areas will have different prevailing bedroom and bathroom configurations. While there will probably be demand for a variety of houses, I prefer to buy rentals that are average and “expected” for that particular neighborhood. This is because, for example, if an area tends to attract middle-class families, it may be more difficult to rent out a 1 bedroom condo. 2 bedrooms is okay, but 3+ bedrooms is preferred. The more baths the more fixtures that have a potential to break. No family in their right mind will want to buy a 1 bathroom home so keep in mind the exit strategy.

Square Footage: We are trying to find “average” houses that are not too large and not too small to appeal to the largest possible group of prospective tenants. 800+ sq ft is a good baseline.

Layout: Get a floor plan from the turnkey company, if they have it, or look at the photos to get an idea for the layout of the house yourself. Focus especially on the kitchen and bathrooms, which should be functional and large enough to satisfy most tenants. Avoid properties with weird layouts, small or dysfunctional kitchens or other noticeable defects.

Parking: In order of preference, tenants prefer garages, covered parking or at least assigned off-street parking. A house with only street parking will likely be harder to rent.

Yard: Most houses will have at least some front or back yard. I don’t have a particular preference on the size of the yard, but I do prefer it to be fenced in. I also avoid properties with any sorts of yard amenities or improvements, such as pools, fountains, large trees, etc.

Construction Material: Most city blocks are built using similar construction materials, but there may be exceptions. Brick homes tend to last the longest, but may require very expensive structural repairs as they get older. Wooden homes are cheaper to repair, but can have pest infestations.

Floodplain: You can look up a property’s potential flood information on FloodTools.com. Their reports will tell you if the property is in a floodplain and likely to flood. You may want to avoid buying properties in areas that are prone to flooding or at least think about purchasing additional flood insurance. Most homes built before 2000 will not have a desirable open floor plan and will be functionally obsolescence to some degree. Be careful of investing in properties that fall in the FEMA 100-year flood map. Insurance can help mitigate a loss but something to check on your own – https://msc.fema.gov/portal/home 

Occupancy: Prefer occupied, will sell vacant

HOAs: Typically, you want to avoid properties with HOA’s as this will reduce your cash flow. 

Tenant Seasoning: No seasoning of tenants required

Rehab Scope of Work: Ask the turnkey company to forward you the full scope of work (SOW) that was performed during the rehab. This will give you an idea about the condition of the property before the repairs were made and allow you to hold the turnkey company accountable for the work they did.

Property Photos: Almost all turnkey companies will have at least some pictures of the property post-rehab. Avoid properties that do not come with pictures. If you’re unable to see the property yourself, this will be one of your only sources of information.

Section 8 or Straight Rent: Although it’s usually possible to find both “straight rent” and Section 8 tenants even in the lower-end neighborhoods, it may be difficult to avoid Section 8 in certain areas (which is okay post COVID-19!). Ask the turnkey provider whether the property is already rented through the Section 8 program and whether this will be likely in the future. 

Cash Flow: Most investors have a minimum monthly cash flow (mine is $150/unit) and a minimum cap rate (mine is 8%) they will accept. It’s also a good idea to look at the cash on cash return of each property once you figure out how you’re going to finance it. The COC will tell you the return on your invested capital you can expect in the first year and should be higher than 10% in most cases.

Much of the information above is part of the home’s public record and can be obtained for free from the local county property assessor’s website (ex. search for “San Diego county property assessor”) or sites like Zillow, Trulia, and Realtor. It’s a good idea to verify all information through at least two different sources.

And as with the neighborhood, it’s always better to look at the property in-person yourself or at least have a trusted friend, family member, or partner do it for you. If that’s not possible, then be sure to look at as many pictures as possible to get an idea for what the house looks like on the inside and outside.