Crunching the Numbers and Doing Rigorous Due Diligence

Before you buy an investment property, you have to know the answers to all of the following questions...

How strong is the rental market? Okay, you just saw a couple of two-bedroom apartments in the area rent for $750. But you're looking to buy a 20-unit building with all two-bedroom apartments. Is there enough demand? Can you rent them all out at $750?

Will the property cash flow at market rent? Will it cash flow at a 15 percent to 20 percent discount to market rent (in case the market softens or you have to lower your rents to remain competitive)?

Are you fixing your interest rates? By doing so, you don't become hostage to another economic factor over which you have no control.

Are you buying at a discount to the average $/square foot for that type of property in that area? When you buy at a discount to start, you have that much greater a margin of safety going forward.

Have you thoroughly investigated what your operating costs will be? Don't take the seller's numbers at face value. They often understate costs - especially real estate taxes. (Your taxes may rise significantly if you're paying a lot more than what he paid years ago.) The key point is: You must know your costs well in order to have a reliable idea of what your net operating income and cash flow will be.

Have you considered deferred maintenance and any major expenditures that will be yours in the next few years? From a new roof to repaving a parking lot, significant expenditures of this sort can eat up cash flow and even cause a property that is not sufficiently capitalized to go into the red.

Do you have honest and competent management set up for the property? Properties that look good on paper can quickly turn bad when you have poor management.
Are you buying near or below replacement cost? This is especially important in a bear market.

These are all factors over which you have significant control. And when you get good at doing this kind of due diligence, you can scoop up bargains in a bear market - without caring that you may not be buying at the absolute bottom.

Tune into the live presentation of the Home Seller Assist by John Alexander each Tues and Wed at www.fastsellerloans.com followed by a Q&A session.