Of all the decisions an apartment investor has to make along the way toward purchasing a property, deciding which property to buy is one of the most difficult. Which area, which part of town, how big, what’s the potential for growth, and then all of the financial considerations. Or maybe financial considerations first?
Whatever your method, you have many factors to consider, some of them complicated. If you’re like me, you might want to think of all the issues as black and white, tangible considerations that have to be weighed together. It helps keep me from being too influenced by an emotional aspect of the property. “It’s right on a main road!” That’s great, but is it also the target of graffiti or burglaries because it is so visible? Let’s look at a better way to think about these factors.
My criteria for buying property is that it must have good income and potential for improving value. I’ll certainly be picky about location and condition but these are factors that are always near the top of my criteria.
Then it starts getting tricky. There are many other factors that go into a decision to buy, including the type of tenants the property attracts, the growth rate of the surrounding area, crime, and the amount of deferred maintenance and expected repair costs, but how do you properly weight each of them? And account for unique aspects, such as “This property could be subdivided and another building constructed.” or “Next door is a halfway house.”
I use the Attractors and Detractors process. An Attractor is a quality that makes it compelling and interesting. It could be that a new Walmart is going in nearby which will attract people looking for employment, or that the current owner has been reluctant to raise rents for several years and rents are way below market. A Detractor is a quality that you don’t like. It is unique to your needs and tastes, and may not be the same for another investor. You don’t like units in such poor condition you can’t rent them? Then don’t buy it. But someone else will, and will know how to fix it up. And they’ll get it for a good price.
Itemize your Attractors and Detractors and be thorough. This is what should drive your decision. Then weight them and stack rank them. When you have multiple properties, this becomes your focal point. It gets you to think more clearly and objectively about what is truly important to you. In your Attractors column you might include
- Net Operating Income
- Market upside
- Neighborhood well taken care of
- Close to main road and transit routes
- Well maintained
- Good proportion of 2BR units (studios and small 1BRs tend to have high turnover)
- Something I can do to drive value (Fence? Covered parking? Laundry? Secure mailboxes? Air conditioning?)
And for Detractors, be aggressive. If our emotions are going to get us, they will obliterate any critical thinking at this point. “Oh it’s so pretty” causes us to ignore “but it’s the only nice property in the neighborhood”. Some examples:
- Broken glass in the parking lot
- Cars are older, have junk inside them (this is how they’ll care for their unit)
- Gutters have leaves (think maintenance!)
- Broken blinds
- Junk in the yard
- High water bill (you’re thinking “oh I can fix that” – but can you?)
Many Detractors are stand-alone show stoppers. In fact, there are several that for my criteria cause me to stop looking at that property and move on. Think about every one of them, and if it’s something you can live with or fix.
I use my gut and my gut has kept me out of trouble, but I don’t rely on it and I definitely don’t rationalize the Detractors because of a gut feel. Using the Attractors and Detractors process, you’ll more easily be able to evaluate different opportunities and not have to rely on your gut.