I got into real estate with little time and large ambition. Not knowing what to do, I started where most would, reading books.
Amongst the hundreds of hours I spent reading, The Book on Rental Property Investing by Brandon Turner has left the most lasting impression.
Of all the lessons, one message has truly stuck - analyze continuously and make offers often.
Though Turner gives great tips on how to build a simple model on how to do this, he doesn’t cover how to build an action-oriented system.
With this in mind, I’ve built one myself over the past few years. This has helped me acquire 5 properties, mostly as a part-time investor.
The system I’ve created is meant to help an investor with two things - rapid analysis and deep diligence.
The three components parts are:
Deal analysis - looking at a lot of properties
Macro and micro analysis - review neighborhoods and other comparable properties in the area
Property condition and fairness analysis - developing a short investment thesis
In a lot of ways, this is like a lead funnel. Only the best and most thoroughly reviewed properties make it through.
I’ll go through the funnel throughout a series of posts, but here, I want to elaborate on the first part - looking at a lot of potential deals and passing them onto the next phase. In my practice, this is equivalent to 3-5 deals within 30 minutes.
Getting to this level requires some work in the art of habit building. However, once habituated, it can be a gateway to analyzing properties regularly and ultimately into the game.
Let’s walk through the high level of it all, and I’ll leave you with a link so you can download it yourself.
Disclaimer: This is my “dumb” manual process. I am sure there are smarter iterations of this out there. This works for me because the manual nature of it helps me be more critical of every property I look at. One day, I might move on to something more intelligent.
The Daily Analysis
To preface, I’m a buy-and-hold investor. Meaning, I’m seeking to achieve financial freedom through multiple cash-flowing units. This system reflects that intended outcome.
High-level details
My goal is 3-5 deals/daily within 30 minutes. I time box this so I can be efficient and effective in a short period of time. Work smart, not hard.
With this said, I keep track of my total analyzed each month.
For each property, I clearly outline property details. This helps in the later stages of my funnel.
Property address - allows me to quickly research the neighborhood
Type of property - gives me an idea of how much work this might be to manage
Square feet - gives me a data point to compare when I’m trying to estimate fair market value
These details make it efficient at later stages so I can focus on diligence for properties that have passed the first test.
Key Metrics
As noted, I’m a buy-and-hold guy. With that, I have two primary goals:
Make sure the property cash-flows
Make sure I’m buying the property as far below market value as possible
To do this, I track two simple yet powerful metrics to gauge the attractiveness of a property:
Cash on cash return - the amount of cash I expect to net annually divided by the net investment
Price/sq ft - the list price of the property divided by the number of square feet
A secondary metric I review, which is an input into both, is the monthly return. As someone who is on a path towards financial freedom, this provides me with a number I can use to add to the rest of my portfolio to verify my passive income.
The outcome of these metrics is the gating factors. If the property achieves a cash on cash return above 10%, and the monthly cash flow is $300+, I’ll move it into the next phase of my funnel; if it doesn’t, I move on to my next analysis.
Inputs
Getting to these metrics is the meat of the process. I use a few key inputs per property, but mostly use worse case estimates for the rest. I do this so that I’m forced to be more conservative.
Key inputs include:
List price - the amount the property is listed for
Estimated rehab - based on photos and experience, what I expect to have to invest after purchase to make the property rent ready
Property taxes - from the listing, I can view the exact tax amount for the past year
Property insurance - based on experience, I can typically estimate the home insurance required
Estimated rent - based on a tool I use, rentometer, and the listing, I take a conservative estimate of rent
Key estimates
Interest rate - monthly, I try to get an estimate from my lender on rates; of course, I can use public data, but I know I can get better rates based on my profile
Capital expenses reserves - expenses related to replacing big items, like HVAC, roof, or water heaters; I usually estimate 10%
Maintenance reserves - expenses related to repairs; I usually estimate 8%
Vacancy expectations - the potential for the property being vacant for 1 month; I usually estimate 8%
Property management estimate - I include this cost so that when I want to consume my passive income, I can pass it off for management; I usually estimate 10%
Prioritization
With this system set up, I can assess 3-5 properties with little effort in 30 minutes. As I add in my key inputs, my key metrics become clear, and naturally, prioritization occurs.
For ease of reference, if a property meets my cash on cash return of 10%, I highlight it as green. This provides me a visual indicator to reference and speak to when I reach out to my realtor for more information.
Using the system
Doing rapid diligence in this way gives me a competitive edge. I know exactly what I’m looking for, and I can get that information quickly. When I’m on the hunt, I do this daily; when I’m accumulating capital, I do this rarely. Regardless, when I know I’m ready to invest, I have a simple system I can rely on.
As mentioned, my system is a funnel. This is the top. If I met my cash ROI, I move a property into a more detailed analysis process - the macro and micro review.
Here is a link to the template so you can get started yourself.
In an upcoming post, I’ll share how I do a comparative market/comparative analysis, review the neighborhood, and the criteria needed to move a property into the final stage.