Our Street-Smart Panel Discusses What to Consider When Looking for Maximum ROI in Residential Property Investments
Scott Sklare
Before getting into the specifics of how I decide where to invest for maximum ROI, I would like to take a step back and look at the bigger picture. The answer to this question can be addressed by methodically plugging into a five-step process.
1. FIND
How easy is it to find the right property with the right terms and the right price in a given geographical area?
2. ANALYZE
Your analysis entails both financial and nonfinancial variables. Do the numbers and terms make sound investment sense? Do the nonfinancial variables point in the right direction?
3. BUY
Can you get financing in that market space, whether it is private or conventional financing?
4. MANAGE/FIX
Who is going to manage or fix the property if you hold or sell? If the location is a distance from where you reside, you will have to hire a professional property manager or rehabber.
5. GROW/SELL
Do you envision growing your portfolio in a particular geographical area?
Let’s delve deeper into Step Two: Analyze. After all, if the numbers do not work, everything else is moot.
I recommend you find software or an app to simplify the process. Of the many out there, I like RealData. I have used it for 30-plus years and find it to be invaluable to my real estate business and practice.
Your analysis will entail various financial as well as nonfinancial considerations.
Among financial data to evaluate are price, down payment, interest rate, rental and vacancy rates, operating expenses, net operating income, capitalization rates, repair costs, cash-on-cash return, gross rent multiplier, property taxes and appreciation.
Ideally, the seller will provide you with accurate, historical information. In addition, you should research the comparables for price and rental rates. The MLS, Zillow, Realtor.com and RealtyTrac are a few of the valuable resources that are readily available to provide some of these answers.
The nonfinancial analysis is equally important. Consider the following variables when evaluating your hometown or other geographical areas for investment: school district, crime rates, employment rates, neighborhood business, traffic, distressed and REO properties, job creation, wage gains, technology trends and stability of the local economy.
There are many resources—some requiring a fee and others available for free—that can help provide valuable listings and ranking of cities, towns and Metropolitan Statistical Areas (MSA). One that I like and value is the Milken Institute’s annual study, “America’s Best Performing Cities—Where America’s Jobs Are Created and Sustained.”
Once you have gathered both financial and nonfinancial data, I suggest you create a side-by-side table that allows you to rank, compare and total one town versus another.
Mike D’Arrigo
Founder and Owner, Pinnacle Investment Properties
We’ve all heard that “location, location, location” is the most important factor when buying real estate, right? But what is it about a specific location that you really need to know before choosing an investment market?
Here are the top three factors I look at when evaluating a market:
- Is the population growing or shrinking? You not only need a growing renter pool, but a strong and vibrant economy, as well. Healthy cities have growing populations and new household formation. Look for metropolitan areas with population growth that exceeds the national average.
- Is the number of jobs increasing or decreasing? Some markets show decreasing unemployment rates, yet jobs are declining. Rather than looking at unemployment rates, which can be misleading, focus instead on the total number of jobs created and the industry sectors in which those jobs are located. Is there a broad-based employment base, or are jobs concentrated in a single industry?
- Are incomes rising or declining? Rising incomes can drive up rents, increasing your cash flow and indicating a healthy economy. Not all income growth is equal, however. Many markets are seeing growth only in the higher-income ranges, which may or may not be representative of your prospective tenant pool.
Fortunately, most of this data is available at your fingertips through the U.S. Census Bureau and Bureau of Labor Statistics.
John Gutman
VP of Sales and Acquisitions, Mack Companies
Location is one of the most important factors to consider when purchasing investment homes.
Our criteria take all life situations into consideration when determining those locations. We look for areas that are already developed, that offer approximately 80 percent current home ownership where that ownership exceeds rentership and that have an active municipality. We find those to be the most desirable areas.
The next layer of criteria includes the following: distance to top-quality schools as well as to major highways, shopping, restaurants and nightlife and nearby thriving business commercial corridors. We look to follow on the coattails of the “big box” stores, as they’ve already spent millions of dollars on area market research. If they are there, we should be, too.
Homes should be within walking distance of elementary schools so that young children can walk to school and parents do not have to worry about transportation to get them there. The homes also should be within three miles of a high school.
We look for properties within five miles of major interstate and route access, as well as any public transportation such as Metra, CTA or PACE to make traveling between towns or into the city very easy for work or personal purposes. Homes should also be near areas that offer many options for the various types of shopping, restaurants and nightlife, as well as the essential occasional business needs.
These criteria demonstrate ease of living and continue to attract long-term homeowners and renters.
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