5 Legitimate Questions Investors Should Ask About the Rental Property They Are Presented

Whenever a real estate investor considers an investment property to purchase, numbers regarding things such as price, cash flow, and rates of return are presented upon which the investor is expected to make an investment decision.

Therefore, the question is, should the investor accept the numbers and make the investment or should the investor question the numbers?

In this article we will consider five legitimate questions the prudent investor should ask about the rental property data he or she is presented.

1) Is the Property a "Good Opportunity", Really?

Say, for example, that you’ve alerted several real estate professionals in your area that you’re in the market for an apartment complex, and soon thereafter get a call from one of the agents about a rental property for sale in the MLS followed by a fax or email with the listing information.

Should you become excited because the property is touted to be a great opportunity, with lots of upside potential, and in a good part of town? No, (1) because none of that directly addresses the profit you might earn from owning that rental property, and (2) because the agent who sent you that information is merely shuffling some listing agent’s data and appears ill-informed about real estate investing or at the very least, extremely lazy.

2) What are the Numbers?

Suppose one of those agents calls you describing an apartment complex as “beautiful”, how should you respond as an investor? If you’re astute, your response will probably be similar to that of one of my investors. “Only women are beautiful,” he said, “what are the numbers?”

Here’s the point. Real estate investing is all about the numbers. Whether or not the rental property has a good location means little, unless by “good” the agent is suggesting that the property commands high occupancy and market rents.

3) Do the Numbers Support the Claims?

Likewise, terms like “great opportunity” and “lots of upside potential” are only credible when there is evidence to support it. Either way, you should expect the agent who presents you with an investment property opportunity to also present numbers to back the claims.

4) Is the Data Accurate?

Though most brokers are honest, bear in mind that a listing agent often uses the rents and operating expenses supplied by the seller, and only in rare cases actually substantiates those numbers. Besides, many sellers and listing agents tend to be over zealous and might optimize the numbers.

5) Has the Data Been Substantiated?

Conversely, I would question a realtor who is trying to sell me investment real estate if he or she does nothing more than passes me information gotten from the listing broker.

In this case, I would expect to see much more than what appears in a typical listing. I would expect before and after tax cash flows and rates of return based upon my marginal income tax rate so I can see my taxable gain or loss and underlying returns, a comparable sales report, a proforma income statement with revenue projections, perhaps some rent scenarios and an acquisition funds summary, and so on. In other words, I would expect a broker who supposedly is working for me to “partner” with my efforts and provide me a full rental property analysis I can compare against my investment plan.

I look at this way. If a realtor wants me to invest hundreds of thousands of dollars so he or she can partake of the booty, the least they can do is invest several hundred dollars on real estate investment software to assist me with a prudent investment decision; the least he can do is care how I spend my money.

If you’re fortunate to find a real estate agent able and willing to stand alongside helping you crunch numbers, then half your battle is won. If not, don’t simply accept what’s presented you, obtain your own real estate investment software and run the numbers yourself. Remember, all the numbers associated with real estate investing are like peanuts, you don’t swallow until you crunch.

It is your nest egg at stack after all. Therefore, with or without the help of a realtor, do not make a rental property investment until you comb through the numbers fully, and are completely satisfied you are making the wisest investment decision you can to safeguard it.

James Kobzeff is a real estate professional and owner/developer of ProAPOD - quality real estate investor software for investment property analysis since 2000.