3 Things to Look for In a Rental Property
The Amplified Impact Podcast
November 20th, 2023
While my other podcast delves deep into multifamily investing, today I’m sharing the three vital factors I always look for in a property.
Firstly, it’s all about location…the neighborhood vibe matters more than you think.
Secondly, cash flow is key. It’s not just profits; it’s the lifeline of a healthy property.
Lastly, I seek potential for improvement, a chance to enhance the property’s value.
For more insights, check out my other podcast.
TWEETABLE QUOTE:
“And so sometimes it’s a matter of finding something that you can improve, but sometimes it can also just be as simple as buying it for less than what it was worth. And that comes into all sorts of tactics and techniques and strategies for getting in front of sellers and trying to get those deals.”
– Anthony Vicino
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Episode Transcript:
Anthony Vicino:
Alright, so I don’t talk about real estate a ton on this podcast. For that, I would recommend you go check out my other podcast, which is multifamily investing. It’s simple. There’s like 500 episodes there. If you want to learn about real estate, that’s probably the. The deeper place to go. But I have been getting a lot of questions from people about buying real estate and, like, getting into it for the very first time and what should they look for? So I thought I’d just do a quick episode on the three things that I look for in a building. So for context, we own about $85 million of assets.
Anthony Vicino:
That’s roughly 40 buildings and 500, 600 units or something like that. So we have a pretty good track record or history with real estate at this point. And the three things that I look for, just to keep it really simple, is, number one, is location. It’s all about location. This is the one thing that you really can’t change. And I’m not just talking about the market itself, though. That is very important. You want to be looking at a strong macroeconomic environment, someplace that people are moving to, that there’s good jobs, there’s good population growth.
Anthony Vicino:
These are things that are very, very important. But zeroing in even further. The location that I look for, because we only invest in the Twin Cities, we know these are good markets, is the neighborhood location. You can’t change a location. You can go in and you can improve a building. But if every other building on that street is a crack house and there’s gunfire every night, then you’re not going to be able to do anything about that. That neighborhood is always going to suck for a while, and it’s going to be beyond your control. So if you’re looking for something to go and invest in, I would highly recommend that you stay out of those neighborhoods, though.
Anthony Vicino:
A lot of people, when they’re new and they’re just getting started in the game, that’s where they go to because that’s where you can find the cheapest deals. And you probably don’t have a lot of capital to start in the beginning. And so you’re like, oh, what can I buy? Next thing you know, you’re in the hood. And that’s where I started. Full disclosure, nothing wrong with it, but I learned the really hard way that that’s not where I want to be long term. It’s not where you want to be either, most likely. So you want to find a location that people want to live, it’s safe. I think that’s maybe the most important that it’s in proximity to amenities.
Anthony Vicino:
It’s next to good school districts. But that is going to be the most important thing, is location. That’s why people say real estate is all about location, location, location. All right. The second thing that I look for in a building is that it’s cash flowing from day one. And what cash flow really means is we’re going to take out a loan to buy the building. That’s our mortgage. And usually they’re going to lend about 75% of the total purchase price.
Anthony Vicino:
So if we’re buying a building for a million dollars, the bank is going to loan us $750,000. That means we need to bring 250,000 of our own dollars to the table for closing. So what cash flow is, is every month we are going to have a mortgage bill, we’re going to have our expenses, we’re going to have insurance, we’re going to have taxes, we’re going to have all those things that go towards maintaining and upkeeping a building. Right? And that’s going to be a certain number, whatever that number is, I want to be sure that our revenue or the rents that we’re going to be collecting are a certain percentage above those expenses and that percentage above the expenses. That is your margin. That is your cash flow. This is super important because, one, you could look at that cash flow and say, that’s profits. That’s great.
Anthony Vicino:
We love profits. But more importantly, it’s the lifeblood of any healthy business, because that cash flow allows you to absorb costs, any spikes in expenses. So if you have a month where you had to go replace some refrigerators and some new flooring, and it came out of pocket a little bit more than you thought, when you have that extra margin, that cash flow, you’re able to absorb that cost without having to personally come out of pocket, which is a very important thing. Because if you have too many of those unexpected things come up and your cash flow disappears and you don’t have the monetary means to be able to keep pouring into the asset, well, then it’s going to start sliding into decay. That’s where you start to become a slum lord, and you want to avoid that at all costs. So cash flow is very, very important. It is a signal to me that there is enough buffer between profitability and being in the red that I am comfortable with. And then the third thing that I’m looking for is upside potential.
Anthony Vicino:
I want to buy a building that has the potential to be improved so we can make it more valuable, whether that’s making it operate more cleanly so that the expenses are lower. Maybe it’s driving up the revenues so that we can get higher rental premiums. And we do that by going and improving the units. But we want to have a way of actually improving the building, making it better than what we inherited. And the reason for that is then when we go to sell the building, it’s going to be worth more because we made it better. There was upside there. And so sometimes it’s a matter of finding something that you can improve, but sometimes it can also just be as simple as buying it for less than what it was worth. And that comes into all sorts of tactics and techniques and strategies for getting in front of sellers and trying to get those deals.
Anthony Vicino:
But those are the three things that I look for in a building from a very high level. There’s more things, but these are the three. Most important is location, cash flow and upside potential. Take those and go listen to the other podcast. Take that. And if you want to learn more about real estate, I think that’s a really good resource for it. So thanks for being here, guys. We’ll catch you in the next episode.
Anthony Vicino:
Until then, stay hyper focused, my friends.
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