Analysis of an Investment Property

So you want to purchase an investment home

You have heard that home prices in the Phoenix area are appreciating and you think the time is right to buy an investment home.  You are correct in both cases.  As a result you are about to purchase a very expensive investment which deserves your best analysis.

It is always important to determine your needs before buying an investment, any investment.  A successful real estate investment requires the same reflection.  Why are you thinking of investing in single family real estate?  What are you hoping to accomplish – what is your end game?

We have all purchased primary residences, homes that we bought where we now live.  Typically that search was based on our personal specific needs:

  • Price – what we could afford.
  • Location – close to our job, our child’s school, our favorite shopping areas, or our family members.
  • Size or Shape – single family vs townhome/condo, one story vs two story, number of bedrooms/bathrooms, separate living/family vs great room, yard size, or garage vs carport.
  • Amenities – swimming pool, gated community, gourmet kitchen, or wood floors.
  • Age or Condition – Brand new home vs existing, move-in ready vs a fixer-upper.

As a result, before we started the search for our next home, we had our expectations clearly in mind.  We were determined to stay to our requirements.  As it turned out, we also brought along our emotions while we searched.  We “fell in love” with a home and at that moment all of our planning was nothing more than an exercise in futility.  The home we then purchased may have met our general needs but more importantly, it spoke to us on a much stronger personal level.  Emotions played a large and hopefully successful role in selection of our family’s new home.

Clearly there is a place for following personal feeling when making an important decision, but not in the selection of an investment home.  Buying a rental property does have some similarities to purchasing a primary residence but it has decidedly more differences.  Analysis is still a requirement for this purchase but the issues you will need to address are much more complex.

The first questions are:

  • Cash flow vs. appreciation – are you looking to supplement your income or is the eventual increase in the value of your property of greater interest.
  • Financing – 30 year mortgage vs. 15 and the amount that you will be putting as the down payment.

The answers to these two questions will help guide you to the appropriate price range of this investment.  Finding the ideal rental home within your price range will be your challenge.  Following these rules should simplify the process for you and maximize your results.

Rental homes require a very deliberate selection process.  It is helpful to realize that tenants have the same needs as owner occupants.  I have lost count of the number of times I have heard investment home owners explain with all seriousness that tenants don’t care about schools or the fact that their children will be playing in a backyard that is inches away from a freeway.  The investor home buyer’s challenge is that a property cannot be selected based on one family’s needs but should chose a property that will address the needs of a large number of potential renters.   As a result, a successful rental property should address the four basic needs of most tenants:

  • A location that is close to an employment center.
  • Convenient transportation available (public transportation/freeways/large surface streets).
  • Well performing neighborhood schools with parks within walking distance.
  • A short drive to varied assortment of leisure activities (shopping, movies, golf/tennis, sporting events, or community centers).

Buying an investment home that does not meet at least three of these four requirements will result in a negative investment experience.

The specifics of the home are just as important.  A minimum of three bedrooms/two bathrooms is ideal, a single level home has greater appeal than a two story home, a garage is preferred to a carport, and two separate living areas seems to be more desirable than great room.  A potential investment home should offer qualities/amenities that are consistent throughout the home – a large family home should also have a grass backyard large enough for children to play, not a rock area that is low maintenance that is not child friendly.

Emotions will always play a part of our decision making process.  In this case it is important to minimize your personal feelings.  Do not fall in love with a rental home, you will never live there.  Do not rationalize your decision to purchase a home based solely on either price or convenience.  Follow the rules and you should have a very positive investment home.

Good Luck!