Analyzing Long-term rental properties

There are many ways to build wealth throughout a lifetime, but for us, we love building wealth through real estate, and for good reason.

So, we’re back to talk more about long-term rentals. If you missed it our post yesterday included all you need to know about the pros and cons of investing in long-term rentals. To recap briefly, we found that long-term rentals offer income stability, ease of dealing with one tenant, tax advantages, equity building and appreciation. For us they have proven to be an incredible way to invest and grow over the long term, and act as a hedge against inflation. And, in our experience, the returns one might expect can far surpass that of the stock market and we’re all for it. Here, we’ll explore how to analyze potential deals and give you the equations that you’ll need to understand the ins and outs this type of an investment. No matter if you are just starting on the path of investment or have a few under you already, we’ll show you how to simplify the often complex world of real estate wealth building.

First off, let’s remind ourselves what constitutes a long-term rental:

Purchasing a property to rent out on a long-term basis. Can be residential or commercial properties. Long-term is anything over 6 months.

Property Analysis

The most important step in assessing investment opportunities is performing an accurate and thorough analysis of how viable and profitable it may be.

Here are the steps we utilize in our deal analysis based upon our investment project goals:

• Identify a Property: Location, Location, Location

  • Evaluate the neighborhood: Look for areas with strong rental demand, low vacancy rates, and desirable amenities such as schools, parks, shopping centers, and public transportation.

  • Research local rental market trends: Analyze rental prices, occupancy rates, and rental demand in the area to gauge the potential rental income and vacancy risks.

  • Ensure that the property meets demands of your investment goals. Of primary importance is location, condition, and price.

  • Collect all financial data related to the property, including purchase price, annual property taxes, insurance costs, operating expenses, and any renovation or maintenance expenses.

  • Consider property size and layout: Evaluate the number of bedrooms, bathrooms, and overall square footage to determine the property's rental appeal to potential tenants, such as families, professionals, or students. We also look for features that are known to attract tenants such as, updated kitchen appliances, modern bathrooms, ample storage space, in-unit washer and dryer, and ample parking.

2. Calculate Cash Flow or Payout:

• Estimate property expenses such as mortgage payments, taxes, insurance costs, closing costs, operating and maintenance expenses, renovation and updates. Utilize this to calculate the potential income for the property. We suggest creating a detailed Pro Forma Statement.

3. Calculate Key Performance Metrics:

• Use other key metrics to determine profitability of project such as cash-on-cash return, cap rate, and ROI.

• Determine potential rental income: We like to estimate this by pulling comparable in the general area. Also, we typically look at things like the number of bedrooms, bathrooms, condition, overall square footage, and other amenities\ convenience factors.

• Determine operating expenses: We then look at all expenses such as property taxes, insurance, maintenance, repairs, property management fees, and utilities to calculate the property's net operating income (NOI).

• Evaluate cash flow: Compare the estimated rental income to the operating expenses to determine the property's cash flow potential. We want to ensure we have enough of a cushion to generate positive cash flow after all of our expenses. No other option.

4. Understand tax implications:

• Consulting with a tax professional will help you understand the benefits and possible consequences of your investment.

5. Evaluate the risk:

• Identify all risks involved with the investment. This does not just include market fluctuations, but all factors that may impact the viability of your project, like a thorough assessment of rental market stability. We typically look at the stability of the local rental market and consider factors such as job growth, population demographics, and housing supply to gauge the long-term viability of rental income.

6. Perform due diligence:

• A thorough inspection of the property is essential to assess the property condition and estimate all repairs and renovations. Factor in potential maintenance costs and the time it will take to make the property rental-ready, and ensure that this is considered in your offer price. This also means researching property taxes and zoning regulations. We investigate property tax rates, zoning laws, and any restrictions on rental properties in the area that could affect the investment.

Real estate investment analysis requires an extreme amount of patience and diligence as you work to fully analyze the financial picture, current market dynamics, and property opportunity. We always recommend that you have a team of professionals such as a real estate professional, lawyer, CPA, and financial advisor who can provide expertise to ensure you are making the best and most informed decision possible.
Investing in real estate has long been heralded as a path to wealth and financial freedom. And long-term rentals are a time tested avenue for generating a stead income, so what are you waiting for?

Want to explore what Charleston has to offer from a long-term rental investment perspective? Let’s connect.