Buying real estate properties has become more and more popular among investors over the last years. While other assets lacked in performance, real estate properties were and are a safe way to invest your money and generate cash flow by renting out those properties. This story is not about the advantages and cons of real estate as an asset, it is my private checklist for buying properties that you definitely want to check. Over the past twelve months, I have bought six apartments and looked over more than 50 properties in total. But let’s get straight to my checklist.
My Basic Checklist
# Location
The first and most important factor for me is the location of an apartment. It is crucial to understand the demographics of an area as it will determine and influence the value of an object over time. I always take a look at if there are good connections for buses etc. nearby, if there are supermarkets and other shops close and if universities or schools are easy to reach. If those points are not checked, I let go of the object. I do not even care about the listing price at this point because the ultimate goal is to easily find a tenant and have a consistent rental percentage over the next years. If the property is empty, I have to pay for the mortgage and that is not what you should aim for.
# Listing Price
Alright, so the location requirements are met. Now I take a look at the pricing. The first metric I look out for is the price per square meter. Again, this will be influenced by the location of the property and also the state of it. A newly renovated one will be worth more and therefore also has a higher rental price.
I really want to stress at this point that you should have a feeling for rental prices in the area. This can be tricky and difficult in the beginning. My tip for solving this is to simply call a real estate agent and tell them that you want to rent out an apartment with the following specifications. They will give you some insight for free and then you know what to look for.
Once you know an estimate for the net rental fee (without operating costs) you can get, I usually divide the yearly earnings by the listing price, this gives me an indication of the net rental yield of the property.
Example:
- Net rent 350$ ( = 4.200$ per year)
- Property price: 80.000$
- Net Rental Yield: (4.200 / 80.000) * 100 = 5.25%
I am always looking for at least 4% upwards. Why is this important? It tells you how much you generate per year through rental income which is used to pay off the mortgage. The higher the yield is, the faster you can pay it off.
# Operating/Running Costs
Ok, if location and profitability are checked, we can lot at operating costs. You really want to weigh them into your decision-making process as they directly affect your net rent. Operating costs are the ones that you will always have to pay, they are usually charged by the management of a tenement block. Sometimes heating costs are also included in them but that is not always the case. High operating costs are a red flag for me and they should be for you as well. Let me give you an example.
Let us assume we know from a real estate agent that we can get 500$ as monthly rent. Now we need to subtract the operating costs to finally get to our net rental share. The higher the operating costs are, the lower your net income will be. As you need to pay off the mortgage with your net share, this becomes crucial and directly affects the profitability.
On top of that, high operating costs sometimes indicate that either the heating mechanics are old or that the house has no proper heat insulation.
# Reserve Fund
The reserve fund should also be taken into consideration when looking at the house in total. Each complex usually has a certain number of units and each unit is contributing a monthly share to this reserve fund. The reserve fund is then used to make future adaptions to the building like fixing the roof or renewing the façade.
Personally, I only buy an apartment if there is a positive reserve fund on the sheet. On top of that, I try to calculate the share per unit to see how much my apartment contributes to the fund at that point in time. When looking at the operating costs, the share of the reserve fund will be explicitly stated. Legally, you can not let your tenant pay this for you. So this also needs to be taken into consideration when looking at the net rental rate.
Sometimes, apartments have a higher reserve fund rate because of some renovations that were taken. Take a close look at them, having those for the next ten years can be critical for example. One of my properties has a higher reserve fund rate for the next five years to come. This is still okay for me as I deducted this total sum from the listing price when negotiating with the old owner.
# Future Property Changes
This is probably one of the most overseen factors to weigh in. When I am looking into buying an apartment, I usually try to figure out why the current owner is selling. Selling motives can vary a lot, some people just need the cash or want to get rid of the organizational work that comes along with owning real estate.
However, one specific case should be closely monitored. Now and then, all owners of a building come together to discuss future investments and changes to their building. Usually, this is organized by the management of the tenant block. I would really recommend asking for the latest protocol of these meetings to see if there are planned investments foreseeable. To give you more context, some owners may decide to sell their apartment because of a huge upcoming investment. As those will be distributed to all the units, you will have to pay for them in the end. Most of the time, investment costs are connected to another mortgage that causes then an increase in your monthly reserve fund rate. So watch out for such situations!
# Property Condition
This point may be the most obvious one but I still want to add a couple of lines here. When inspecting an apartment, I check for the overall condition and try to get the first feeling. I take a close look to see if all works properly (kitchen etc.) and also if there are no problems with moisture. Usually, I only buy apartments that are above the ground/first floor. Typically moisture will not be found higher up in the building but you never know.
If everything looks good, I also take a look at the cellar to see if there is no dampness or moisture as well.
If all looks good and the previous elements on my checklist are ticked as well, I look to buy the property.
Summary
In the end, a few very clear should be OK when considering to buy an apartment.
- Is the location and demography of the object well?
- Is the listing price appropriate for the location?
- What can I get for a total monthly rent?
- What is my net rental yield?
- In which condition is the object? Is there any moisture or something similar?
- How high are my operating costs?
- What is the reserve fund rate per month? How high is the reserve fund of the total complex?
- Are there any upcoming investments planned that will cause unknown costs?
If you can answer all these questions, you will have a good understanding that will help you make the right answer whether to buy the property or not. Setting up a mortgage strategy is another topic I will cover in another story. The baseline here is to set up a plan that allows you to pay off your monthly rate with the net rental income each month. This way, your tenant will pay for the property over time.
— Alex
Note: This is not financial advice or a guarantee that you will buy without any risks. Real estate investments, like all other ones, always bring risks with them. Some of them are known, some are unknown. The story just reflects my personal learnings over the last year and I hope it helps you as well. Always inspect a property in detail and ask for professional help in case of doubt.
