Buying a rental property as an investment is similar to buying a home to live in. However, the most important differences are being able to determine if the property will give you a positive cash flow, be manageable based on your schedule, and if it will be appealing to tenants (not to you).
I think the “qualitative data” investors look for includes location and job-market, which are part of the five must-have features of an income property.
As for metrics, here are some pieces of information from the article, “8 Must-Know Property Assessment Values,”
1. Number of Days on the Market
This number helps estimate if a property is priced too high or has too many issues. Good properties in the right neighborhoods with correct prices usually spend the least amount of days on the market. So if the number of days seems too long, find out why. If you are looking to flip the property, maybe this won’t be an issue for you.
2. Monthly Payment
The home’s mortgage, tax and insurance costs are important to know because they determine if you can afford the property or not. If you are buying the property for an investment, this figure tells you what your minimum rental income should be. Does this number give you a positive cash flow?
In addition, you need to know how much your down payment will be. Buyers who want to live in the property have the option of applying for an FHA loan and can put down as little as 3.5 percent while investors are usually required to put down 20-25 percent. Sometimes, they are required to put as much as 40 percent.
3. Debt-To-Income Ratio
A standard owner-occupied home (buying a house to live in) should not have a debt-to-income ratio of more than 36 percent. Some lenders, however, go up to 45 percent depending on things like credit score.
If you are applying for a loan for an investment property, the maximum debt-to-income ratio is 45 percent. Before looking for a property, know what ratio you need to qualify for financing.
4. Number of Offers
You should talk to your agent early on in the search process about the price range competition in the neighborhood.
Ask specifically about the properties that are similar to what you are looking for. Hence, if you are looking for a condominium, how much are they selling for? What is the selling price compared to the listing price? This will indicate how assertive you need to be to obtain a house. However, being assertive does not mean going above your budget.
5. Capitalization (Cap) Rate
This number is very important because it is an estimate of your potential return. The capitalization rate is the rate of return based on a real estate investment property income.
[(Annual Rent – Annual Expenses)/Total Property Cost] X 100
The number you get from this formula is a percentage, which indicates how much profit you are expecting to earn per year. Don’t forget the total property cost includes repairs, taxes, insurance, vacancies, agent fees, etc. You can use an investment property calculator to simplify this process. A “good” cap rate depends on the area and property you are looking for.
6. Price-To-Income Ratio
This is the comparison of a median household price to the median household income. It is important to know this ratio in the area you’re investing, so you can compare your own budget to your expected income. If you are investing, you should also know this number because it tells you what kind of rent you can expect and if it can meet the one percent rule.
For example, you are purchasing an investment property for $400,000 in an area with an average income of $60,000, making the ratio 6.6. If the area you are investing in has a ratio of 2.5, then your comparison has a big difference and could mean you will not get a high or a quick ROI. If you are buying a house to live in, divide the price of the property by your annual salary, does it come close to your area’s ratio?
7. Price-To-Rent Ratio
This ratio is the median home price to annual rent in a market. To get this ratio, divide the median house price by the median annual rent. Generally, consumers should consider purchasing the property when the ratio is under 15 and rent the property when the ratio is above 20.
For example, if the median house price is $400,000 and the median annual rent is $30,000, the ratio is 13.3. This means you should probably buy the property because you can pay it off sooner. Investors should watch out for this numbers because a high ratio can make the investment opportunity difficult.
Whether you are buying or investing and looking to obtain another property of a similar style later on, know what your chances are of finding a similar property.
There are other important metrics to consider like occupancy rates, revenue of nearby properties, tenant insights, comparing which strategy makes more money (traditional or Airbnb), etc. These things can be found on Mashvisor. It especially sheds light on metrics for those interested in Airbnb investment properties.
Read Diala Taneeb’s answer to, “What Are the Main Metrics That Real Estate Investors Look at When Deciding Which Property to Invest In?” on Quora.