One of the biggest mistakes I see investors make is focusing too heavily on spreadsheets and not enough on operational performance. A property may look great on paper, but if the location, condition, resident profile, or maintenance expectations are wrong, the investment can quickly underperform.
I have been selling and managing Kokomo rental properties for over 15 years. I have helped investors all over the world purchase over five hundred rental properties in Kokomo. I also own numerous properties and am currently buying rental properties.
Here is how I determine if a Kokomo rental property is a good investment:
STEP 1: PRE-PROPERTY ANALYSIS
Before I go to the property there are several items I look at:
Does this property fit my model? I have established a type of property I want to own. It’s fairly broad but still has some perimeters. I look for a certain age and size. Too big, small or old and I move on. Now sometimes if the price is good enough, I may buy outside my “ideal rental property.”
Is it priced right? I am careful here because I have not seen the condition yet. With that said I generally have a good idea if its priced right, overpriced or if it is a deal. The main thing I am looking for here is if it is over or underpriced. If underpriced I turn up my sense of urgency.
How is the location? I want to make sure I know the location and area rating. This will tell me what kind of residents the property will attract. This helps me set realistic expectations on what kind of residents to expect. I also want to determine if the area is stable or trending up or down.
Estimate the rent. Accurately estimating the rent is one of the most important steps in evaluating a Kokomo rental property. Over estimating rent by as little as 10% can make the difference in a property having positive or negative cash flow. I always have my property manager do a rent analysis and I will use the lower end of the estimated rent range.
Review listing photos to get an idea of condition. I am just trying to determine if the property “appears” in average, above or below average condition.
I look at the price again and do some very quick math to determine if I want to walk the property. If so, I move to the next step.
STEP 2: PROPERTY WALK THROUGH
First thing I look at is the location within the location. How are the neighbors? Will they be an issue renting the property? I look at where the property sits within the area. Is it on a busy street? Close to road? A park or any other desirable items? I want to make sure there won’t be issues getting the property rented or keeping it occupied.
I then determine how easy the property will be to rent. I look for items like bedroom count, room sizes, yard size, any amenities or property challenges.
I evaluate the condition and determine what repairs are needed to rent the property. This is a crucial step and one that many investors get wrong.
I want to determine what repairs or improvements are needed to attract the best residents possible at market rent. I also look for deferred maintenance items or components that may become major issues in the future.
One of the biggest mistakes investors make is focusing only on what the property needs today instead of what it may need over the next several years.
I evaluate major capital expenditure items such as:
- Roof
- HVAC systems
- Windows
- Plumbing
- Electrical
- Foundation
- Exterior components
If I believe the roof may need replaced within the next five years, I want to know that now and budget for it accordingly. I do not want large surprises after purchasing the property.
I also look for opportunities to improve the desirability and performance of the property. This is where having a strong property management team becomes extremely valuable.
Not every improvement increases rent or attracts better residents.
I rely heavily on my property management team to help determine:
- What upgrades residents actually value
- What improvements help properties rent faster
- What amenities improve resident retention
- What items are unnecessary for that area or price range
I then run the numbers to determine if those improvements make financial sense.
STEP 3: RUNNING THE NUMBERS
The first thing I do in this stage is determine what the after-renovation value (ARV) will be. I estimate the cost to make the property rent ready and then look for comparable homes that have recently sold that match the location, size and condition of my home. This tells me if my all in costs are at, over or under the “estimated value” of the home. What I am hoping for is that my all in costs are under the “estimated value” and I have some potential equity opportunity.
Next, I estimate an ongoing maintenance budget. Based on the property condition after repairs are completed, I determine what I believe the average annual maintenance costs will be under normal operating conditions.
Many investors underestimate maintenance expenses, especially on older homes. Even well-maintained rental properties will require ongoing repairs, preventative maintenance, and occasional unexpected issue. I also believe maintaining a property well improves resident experience, reduces turnover, and protects long-term property condition.
In most cases, my annual maintenance budget falls somewhere between 5-15% of the annual rental income depending on:
- Property age
- Property condition
- Location
- Property type
- The type of residents that will rent the property
I then determine what the estimated property taxes will be. I do not want to count on what I see on a listing sheet. In Indiana, property taxes are based on the assessed value and paid in arrears. I look to see what the property taxes will be based on the current assessed value and use that number for my cash flow analysis.
Lastly, I do a cash flow analysis. I determine my estimated annual income: Estimated rent X 12. I then determine my estimated annual operating costs or expenses: Property taxes, property insurance, property management services, maintenance budget, vacancy budget and mortgage payment if applicable. The difference in the two is the cash flow. I must be cash flow positive to even consider making an offer to purchase.
Evaluating a rental property is about much more than just looking at the asking price or calculating cash flow from a spreadsheet.
The best investors understand that long-term rental performance is heavily impacted by:
- Location
- Property condition
- Resident profile
- Maintenance expectations
- Capital expenditures
- Rentability
- Overall operational performance
One of the biggest mistakes I see investors make is buying properties they have not properly evaluated. A property may look like a great deal online, but if the area, condition, or maintenance expectations are wrong, the investment can quickly become stressful and underperform. That’s why I believe successful investing starts with understanding the operational side of rental properties, not just the numbers.
The goal is not simply to buy more properties. The goal is to buy the right properties, in the right areas, with realistic expectations and a long-term plan for success. Ready to grow your rental portfolio? Reach out to us today!