Evaluation of Rental Property

June 2, 2009 · Shokoofeh Nowbakht

for-rent How do you evaluate a rental property?
There are many formulas to calculate different income ratios, various expenses and taxes you incur as a landlord. The first thing you should pay close attention to is the existing leases. Find out the current rents, the remaining lease terms and the annual increase in rents for every unit. It is very important to determine how these rents compare to the rents for similar properties in the area?

Examine the leases carefully! Do the tenants have the option of renewing the lease? What is the increase in rent? Is there rent control enforced on the area? If the tenants have been there for a long time and the rents are lower than the comparable rents, and they have the option to renew the lease, then this may not be a good investment property.
Another important item on the lease is what is included in the rent. Most often the landlords pay for water, garbage and landscaping; and sometimes hot water, gas and basic cable may be included in rent as well.

Vigilantly studying the leases is only the first step to evaluating a property for investment. You would want to also calculate the annual income and expenses and time required of you, then decide whether this is something you would like to invest your time and money on.
Good Luck Investing!

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Tags: income, Investment property, investor, market value, properties, real estate, rent control, shokoofeh nowbahkt

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7 Responses to “Evaluation of Rental Property”

Adam Chinn on June 2nd, 2009 2:18 pm

Great Post Shokoofeh,
There are many factors that go into evaluating a rental property. As you mentioned, you definitively want to take a look at the leases. It may also be good to get a history of the tenants, how long they have lived there, and even meet them personally to see what they are like. Rental property can be great, but if you have a tenant that you do not get along with, it may be more trouble then it is worth.

So many more factors come into play when evaluating rental property when compared to an owner occupied home, but with a good agent you can be taken through the steps and find one that will meet your needs.
Brian Boisson on June 2nd, 2009 3:56 pm

Shokoofeh,

Investment property is all about the return, with little emotion as is usual in personal residences sales that we handle.

Leases must be examined carefully, records and expense statments scrutinized and questions asked.

Great post!

Brian
Michael Monozon on June 3rd, 2009 12:37 pm

Shokoofeh
Great advise and a part of the process that is so often overlooked. As an investor one of the most costly mistakes i ever made was not reading a lease that gave the lessee 3 five year options to extend the lease on a small home in South San francisco at a flat rental increase of $20 a year.
Total rent increase over 15 years $300 a month.
I closed escrow and lived with the mistake for a number of years until the tenant had a job transfer out of state. The only saving grace was the lease had a could not sublease clause.
Thank you for a great piece of advise.
It is called due-dilligence, and do-do- lots of it
whenever investing in any product
Karin C on June 3rd, 2009 4:45 pm

Great advice, Shokoo! I will pass this on to my investor/ buyers. It’s really great advice!
Larry Franzella on June 4th, 2009 10:07 am

What appears to make sense as an investment can change drastically once you review the leases. A must in any investment purchase.

Larry
Lee Ginsburg on June 4th, 2009 10:13 pm

I have seen situations where the owner rents to a relative at an inflated rent to make the numbers look good. Then after closing the tenant terminates.
I ran into another situation that the seller rented back at a good rate for 3 years. After the 3 years he left and rent was down 25%.
knowing the areas rents is important. One can check out Craigs list or I have been using http://www.zilpy.com lately. Presently rents are heading down and zilpy is slow in reacting.
The best way is to drive the area and make calls on the for rent signs. At time I say I am interested in renting other times I just say I am doing a rental survey. Today it is important
to inquire about any move in specials. In this economy I am seeing people move back home or in with more people to save money.
I am seeing for the first time in maybe 20 years that bay area real estate can break even and or generate a positive cash flow with 25% down. Yes investors do not get the very best interest rate but the rates are so low it is a great time to buy investment real estate.
Lee
Julie Cleland on June 5th, 2009 12:33 pm

Don’t forget to check out the local rental laws as well. We who live in San Francisco, are well aware of how Rent Control radically influences how a landlord can treat the property & tenant. For more info on that check out the next blog on PruVoices.com by Kathy Wall, which discusses that very issue.