How Investors Quickly Spot Deals

Now that you've learned how to save taxes using real estate, your next step is to understand which investment properties actually make money, cost money, or build equity over time. Because the truth is, if you buy the wrong property, especially out of state, no amount of depreciation or write offs is going to magically save a bad deal. So today I'm going to show you how to evaluate a rental property in five minutes or less. And this is the exact process I use with my clients here in Seattle, and the same approach I teach investors who are buying in Spokane, Boise, Dallas, Kansas City, or any other market where the numbers make a little more sense from a cash flow perspective than they do here. So let's jump right in. First, here's some mindset shift. Most new investors think if I get a good deal and I get all these tax benefits, it's all going to work out. But that's actually backwards. The tax benefits are just the icing on the cake. The deal itself, the property's ability to generate income, that's the cake. That's the important part. And the deal has to stand on its own without tax perks getting it over the finish line, because we all know the tax laws can change any time. So here's how to evaluate a rental property step-by-step. First, we're going to look at the rents. We're going to do a quick rent shift. So pull up the comparable rentals in the area. You can look at them on Zillow and find the realistic monthly rent for the type of property that you're looking at. Don't guess. Don't use the highest rent you can find. Use a conservative number. Zillow, Rentometer, and other listings on the MLS can tell you everything you need to know. Make sure you zoom in on neighborhood and number of bedrooms and baths, as well as the condition of the home. Second, you're going to calculate your PITI plus utilities plus property management. PITI means your principal interest, taxes, and insurance. And then you add property management costs, unless you're really going to manage it yourself, which you're not going to if it's out of state. And even if you're a DIY person, it's smart to build the numbers as if you're outsourcing management so that one day you can outsource it if you want to, and you're not trapped by your own labor later. Step three, the 1% rule and the 50% rules are something to look at. I don't treat them as gospel, but they are a fast filtering tool. The 1% rule says the rent should be around 1% of the purchase price. Very hard to find these days. In Seattle, this never happens. Homes are way too expensive relative to rents, but in many out-of-state markets, you can get closer to it. It's just one method of comparison. The 50% rule says that about half of your rental income will disappear into expenses, vacancies, and repairs over time. That doesn't include your mortgage, which is coming from the other 50%. So this rule is not perfect, but it's a great gut check. And if your rent doesn't come close to the 1% rule, or if the numbers only work when you use unrealistic assumptions, then you need to be aware of that and realize you might have a lot of expenses that you're not really counting when you're doing this magical underwriting. You don't try to make it work. That's how you lose money. Step four, let's look at the cash flow. Subtract all expenses from your expected rent. If you're buying out-of-state, I want to see at least a little positive cash flow after all of those expenses, not just break-even and not just negative. So if you live in Seattle and you want to keep your current home as a rental, sometimes break-even is acceptable because hopefully you're going to see a lot of appreciation. It's a strong appreciation market. You're going to get some tax benefits, but once you're investing outside of Washington and you're acquiring something for the purpose of investment, the majority of the appeal is cash flow. So it needs to have good cash flow. Step five is the neighborhood test. You can't evaluate a rental without understanding the neighborhood that it's in. So in your first five minutes, look for crime, tenant demand, school scores, access to employers, and what other rentals in the area look like. If you wouldn't feel comfortable walking down the street or if the area looks unstable or poorly maintained, that's a sign to slow down and investigate a little bit more. Cash flow is great, but you also want a stable, predictable, boring rental, not chaos, drama, shootings, garbage, vacancies, baby daddies. That's the five-minute method. Rent estimate, monthly cost, quick rules, and cash flow snapshot. And then finally the neighborhood test. Okay, so if the property passes this basic check, then it's worth running a deeper analysis. You can play around with vacancy assumptions, repair budgets, and long-term appreciation trends, rent growth, and perhaps look at a full inspection. But if it fails these tests in the first five minutes, let it go and look for something that's going to be a better deal. Bad deals are very expensive and good deals pay you for life. By the way, to make this easier, I created a free rental property quick evaluation checklist and you can download it using the link in the comments. It's the same sheet I use when I'm screening properties for my investor clients and most of the time we can eliminate 95% of the bad deals just in five minutes using this exercise. So before we wrap up here, I want to share the biggest mistake that I see Seattle homeowners make. They assume that their primary home will automatically become a good rental if they decide to move. Sometimes it does, but often it doesn't. So the only way to know is to run the numbers honestly, just like you would if you were acquiring it for the purpose of investment. The sentimental value does not count. The curb appeal does not count. The kitchen remodel you love does not count. Rent minus expenses equals reality. So remember, a rental property is not a pet. It's not a hobby. It is a business and a business needs to have profit. Just because it was a trendy business in the 80s or in the 2014s doesn't mean that it's going to be a good profitable business for you now. You won't know unless you run the numbers. So I hope today's video gave you some clarity to make sure that you know what you're doing. And if you want help finding profitable rentals, whether here in Seattle or elsewhere in the country, I'd be happy to help you. That's what my team and I do. And you can reach out anytime through HomeProAssociates.com. And finally, now that you know how to evaluate a rental in five minutes, your next step is learning how to analyze the deal more deeply so you can avoid the traps that catch first-time investors off guard. So make sure you watch my next video, the seven red flags that make a rental property a bad investment. Because if you don't understand these red flags, you can buy something that looks great on paper but becomes a headache or an alligator, as my dad used to call it, in real life. So click over to that video and let's make sure your next property is a winner. I'll see you there.