Facebook
X
Pinterest
Copy Link
A property is listed for $500,000.
Is it a good investment?
There is absolutely no way to answer that question from the purchase price alone.
Investment real estate requires you to look at the entire property as a business.
I’ve worked with residential, commercial and investment properties throughout Connecticut, and one of the things I’ve learned is that a property that looks great at first glance isn’t necessarily a great investment.
And sometimes the property everyone else overlooks is where the opportunity is.
Start With the Income
What does the property currently generate?
If it is occupied, look at the actual leases.
Don’t simply rely on a listing that says, “Potential rent $2,500.”
Potential rent doesn’t pay the mortgage.
Actual rent does.
You want to understand:
- Current monthly rents
- Lease expiration dates
- Security deposits
- Which utilities tenants pay
- Which expenses the owner pays
- Vacancy
- Any additional sources of income
Then you can begin evaluating what the property is actually producing.
Now Look at the Expenses
Gross rent is not profit.
This sounds obvious, but it’s easy to look at a property collecting $8,000 a month and mentally turn that into $96,000 a year without accounting for what it costs to operate.
Depending on the property, expenses can include property taxes, insurance, water and sewer, utilities, landscaping, snow removal, maintenance, management and repairs.
And then there are capital expenses.
A roof doesn’t last forever.
Neither does an HVAC system, parking lot, water heater or siding.
Good investment analysis accounts for the fact that buildings require money over time.
Property Taxes Matter in Connecticut
Two properties with similar purchase prices and rents can produce very different returns if their tax obligations are significantly different.
Always look at the actual taxes and understand whether there are circumstances that could affect them.
Condition Can Change Everything
Deferred maintenance can turn what looks like a great deal into a very expensive property.
That doesn’t mean you should avoid properties that need work.
Some of the best opportunities involve improving an underperforming property.
But you want to know what you’re getting into.
There’s a big difference between buying a building that needs cosmetic updates and one that needs a roof, mechanical systems and significant structural work.
Location Still Matters
The old real estate saying exists for a reason.
Location affects tenant demand, rents, vacancy, appreciation and eventually your ability to resell the property.
For commercial property, I may also be looking at traffic, visibility, access and surrounding businesses.
For residential investment property, proximity to employment, transportation, shopping and other amenities may matter more.
Look at the Leases
When purchasing an occupied investment property, you’re often purchasing existing lease obligations along with the real estate.
Understand them.
When do they expire?
Are rents below market?
Who is responsible for utilities?
Are there renewal options?
Are there commercial tenant improvement obligations?
You should have the appropriate professionals review documents as part of your due diligence.
Think About the Exit Before You Buy
This is something investors sometimes overlook.
How will you eventually get out of the investment?
Could you sell the property to another investor?
Could it appeal to an owner-occupant?
Is there redevelopment potential?
Could the property potentially have another use in the future?
You don’t need to know exactly what you’ll do ten years from now, but understanding your options is valuable.
The Cheapest Property Isn’t Always the Best Deal
I’d rather see someone buy a solid property at a fair price than buy a “bargain” that becomes a financial headache.
Investment real estate is about the numbers, but it’s also about understanding buildings, tenants, locations and potential.
That’s why I enjoy this side of real estate so much.
Every property is a puzzle.
If you’re considering purchasing or selling an investment property in Connecticut, I’m always happy to take a look at the property and talk through what you’re trying to accomplish.
Tom Cavaliere
Coldwell Banker Realty
Residential • Commercial • Investment • Land
