3 Crucial Steps When Vetting a Rental Property

TL;DR

Vet a rental property by setting a target return on investment, calculating the full rehab scope, and identifying ways to add value. Sterling White recommends using calculators instead of relying only on rules of thumb and bringing a contractor to assess big-ticket items such as the roof, electrical, plumbing, HVAC, and decks. Read on for eight practical answers that clarify his three-step evaluation process.

Transcript

sterling white here and those of you on the youtube you know the next steps hit that subscribe button as well as the notification bell that way you can be informed moving forward and if you're just now coming across me yes it's mentioned name is sterling white uh buy and hold investor originally in and from uh born and raised in indianapolis indian... Read More

Key Insights

• Sterling White emphasizes the importance of determining your return on investment (ROI) before making any property purchase. This allows investors to reverse engineer deals and make informed decisions based on their financial goals.
• Understanding rehab costs is crucial, especially for older properties. White suggests bringing a contractor to assess big-ticket items like roofing, plumbing, and HVAC systems to ensure accurate cost estimations.
• Adding value to a property can be achieved through various means, such as increasing rents, decreasing expenses, or adding amenities. This strategy directly impacts the property's overall value and profitability.
• White shares his personal journey from growing up in a challenging environment to becoming a successful real estate investor, highlighting the potential for success regardless of one's background.
• Collaborating with professionals, like contractors, allows investors to focus on high-value activities instead of getting bogged down with detailed cost estimations for renovations.
• White advises against over-rehabbing properties as if investors were going to live in them, which can lead to unnecessary expenses and reduced profitability.
• Analyzing financials is essential to identify areas where expenses can be reduced, such as reclassifying non-recurring expenses like deck repairs to capital expenditures.
• White stresses the importance of setting clear investment goals and using tools like calculators to make data-driven decisions when evaluating potential deals.

Questions & Answers

Q: What are the three crucial steps for vetting a rental property?

First, determine the return on investment you want so you can reverse engineer your purchasing decisions. Second, establish the property's rehab costs, preferably with help from a contractor. Third, identify opportunities to add value by increasing rents, decreasing expenses, or adding amenities.

Q: Why should investors determine their target ROI before buying?

A target ROI provides an end goal that guides underwriting and purchasing decisions. Sterling White gives the example of planning to sell a buy-and-hold property after three years and aiming to double the invested money. Without a defined goal, an investor may buy a deal without knowing the return it is expected to produce.

Q: Why are investment calculators better than relying only on rules of thumb?

Rules of thumb can overlook costs that materially affect returns, such as flood insurance or property taxes that are triple or quadruple elsewhere. White recommends calculators, including the BiggerPockets calculator, to understand what the invested money is actually earning. He says calculators became his go-to approach after initially relying on rules of thumb.

Q: What does Sterling White say about the one percent and two percent rules?

White describes the one percent rule as monthly rent equaling one percent of the purchase price. Around 2013 or 2014, he could find properties meeting the two percent rule in solid C to C-plus Indianapolis neighborhoods. He says that is no longer possible there because prices have increased.

Q: How should investors estimate rental-property rehab costs?

Investors should create a full scope covering exterior work, interior renovations, and major building systems. White recommends bringing a contractor to evaluate the property and provide professional cost insight. This is especially important for an older property requiring significant rehabilitation.

Q: Which big-ticket repair items should investors inspect?

White specifically identifies the roof, electrical system, plumbing, HVAC, and any decks on the property. Investors should also calculate interior renovation costs to complete the rehab scope. On his first multifamily acquisition, required work included restriping and recoating the parking lot, patching potholes, and upgrading unit interiors.

Q: Why does Sterling White recommend bringing a contractor when vetting a property?

A contractor can provide the specialized knowledge needed to estimate repairs and renovations. That keeps the investor from having to memorize costs for every window, floor, or bathroom surround. The investor can instead focus on higher-value work such as nurturing owner and broker relationships, buying deals, and building business systems.

Q: How can investors add value to a rental property?

White identifies three approaches: increasing rents, decreasing expenses, and adding amenities. Reviewing the property's financials can reveal expenses that may be reduced or treated differently, such as classifying a non-recurring deck repair as a capital expenditure. These changes can improve the property's value and profitability.

Summary & Key Takeaways

• Sterling White shares his insights on vetting rental properties, emphasizing the importance of determining ROI, understanding rehab costs, and identifying value-add opportunities. He highlights the need for professional collaboration and setting clear investment goals to ensure successful property investments.

• White's personal story of overcoming adversity serves as a motivational backdrop to his real estate journey. He underscores the potential for success in real estate investing, regardless of one's background, by leveraging professional expertise and making informed decisions.

• The video provides practical advice for both new and seasoned investors, including the importance of using investment calculators and avoiding common pitfalls like over-rehabbing. White encourages viewers to focus on high-value activities and strategic decision-making in property investments.