Real estate investors consider multiple properties before deciding on the best ones to purchase to meet their investment goals.
What information needs to be gathered and evaluated to get a full picture of each property under consideration? It’s important to be thorough and consistent when assembling material facts, which, by definition, impact each property’s desirability and value.
Lazy investors rely heavily on figures provided in a property’s marketing package, like its gross rent multiplier (GRM) or capitalization (cap) rate. Smart investors do their own research into a property and gather their own figures.
This article describes what information is required and how to find it.
Step 1) Map the area
Consider an investor interested in purchasing property in a specific neighborhood or region. The investor first needs to gain a full understanding of the area.
The investor gathers zoning maps from the local planning department. While there, they can also get information on compliance, including:
- environmental or California Environmental Quality Act (CEQA) requirements;
- potential historic preservation requirements;
- any architectural requirements; and
- inspection rules.
The investor locates vacant parcels and teardowns, important not just for investors interested in these types of properties, but for gaining a sense of the area. It’s helpful to assign colors to the map based on what types of property the investor is interested in.
Next, they map what types of rents each map area commands.
The map needs to identify places of interest to investors, including:
- amenities like shopping, parks and centers of culture;
- rail lines; and
- police, fire stations and hospitals.
Step 2) Chart every property
The investor creates a list of all properties in the area. This will give a picture of the inventory available and what properties are in high demand. It’s not necessary to include information on every single property in the area, but knowledge about the area’s mix and placement of single family residences (SFRs), multi-family units, retail units, offices and other commercial structures is essential.
Now, the investor needs to make a list or spreadsheet of what data they will need to collect on each property they want to consider for investment.
It’s important to collect the same type of data on each property, as a consistent vetting will produce a more thorough picture of each potential investment rather than a haphazard sketch which only includes whatever information is readily available.
The investor’s checklist includes each parcel’s:
- improvement status;
- property classification;
- title profile;
- mix of units;
- sales history; and
- things needing further evaluation due to a lack of information. [See RPI IPB Form 2]
The investor may collect visuals of each property, including maps and pictures. At the very least, a Google Map or Google Street View image ought to be included in each description.
Step 3) Identify adverse conditions
The seller will provide the necessary property disclosures, but the investor has to perform their own due diligence on the property. Even when they are not intentionally withholding known conditions, owners cannot always be relied on to provide the most complete information.
The prudent investor researches any adverse conditions identified in the property disclosure or observed, including:
- environmental hazards; and
- special hazard areas, such as Federal Emergency Management Area (FEMA) flood or fire areas.
These adverse conditions may create additional expenses on top of the typical operating expenses, which are more easily accounted for than, say, the potential for floods. It’s important to consider these conditions when setting a value for the property.
Some information may be difficult or impossible to obtain without the current owner’s cooperation. The investor can submit a letter of intent (LOI) to the owner requesting more information. The LOI is not an offer to purchase, but may be the first step in negotiations. An appropriate price for the property cannot be known until the potential buyer gathers information on all material facts.
Step 4) Make a general description
Once facts are gathered, the investor can prepare a general description for each property.
Each general description will include the property’s location. Necessary locational data includes the:
- property address;
- assessor’s parcel number, found on the county tax assessor’s website;
- address of the property’s vested owners, principal investors, the entity’s manager and others;
- neighborhood name;
- census tract; and
- parcel dimensions.
The general description will also include specific information about the property, including the:
- number of units or spaces;
- number of stories;
- design or style of building;
- construction status and type;
- roofing material;
- heating, ventilation and air conditioning (HVAC) status;
- electric meter, if available;
- ceiling height;
- bays; and
- rent range.
All of this information is needed to estimate and compare the most likely ROI for each property.
The next step? Calculating figures like an acceptable cap rate for this property and likely tax deductions.