The process of purchasing an investment property is different than finding a home to live in. For instance, when purchasing a residence, buyers often look for specific features such as floor plans, finishes, and aesthetics that are important to the buyer’s specific desires to make it feel like their home. When purchasing investment properties, buyers do look at some of the same features, but there are other factors to consider as well:

Capital appreciation potential

Does the property have features that will be attractive to prospective future buyers, such as great ocean views, walking distance to the beach, great schools nearby, a desirable neighborhood, an open floor plan, guest quarters, etc.

Capitalization rate (Cap rate)

This business metric helps to quantify and track the performance level of an investment. Simply, does the net operating income or net cash flow (rental income minus operating expenses) provide a rate of return that is competitive with similar properties and other types of investments, such as certificates of deposits? Make sure to look at the property’s tax return when determining the net cash flow. Just looking at the net operating income on a pro forma financial statement based on unrealistic assumptions may show results that are not achievable.

Rentability

Does the location and condition of the property make the property easy to rent?

Zoning

Does the zoning allow for future development of the property? For instance, a property zoned R-5 with over 7,500 sq ft of land could possibly be developed into a duplex as long as there are adequate utilities, reasonable access, and no major easements on the property. Subsequently, the duplex may be able to be condominiumized and sold separately as two units.

Association loans and assessments

For condominiums, make sure you understand whether there are existing and/or upcoming Association loans or assessments. Association loans and assessments can lead to much higher expenses and significantly reduce your future cash flow.

Condition

When purchasing an investment property, an investor must have a complete understanding of the property’s condition. Unforeseen future repairs can be very costly and severely reduce your future cash flow from the property.