Just as person’s genetic makeup makes them who they are, a property’s genetic makeup tells us what it’s made of structurally and financially. I am now going to teach you the financial DNA of an investment property—the fundamental makeup of a property’s financial performance. First, let’s learn what the DNA is. Then, I’ll teach you how to inspect each component of the DNA to see if you can make this property produce more than it currently does. Understanding how the DNA is calculated also greatly reduces your risk of getting “one put over on you.”
There are several things to look for to help create a safety net when determining a property’s financial performance:
- Look for add-value properties. An add-value property is one for which the current owner does not realize its full potential. This potential is realized through the rental rates. Typically, these add- value properties are located in areas where there is a greater demand for rental units than there are units currently available.
- Look for properties that are at most fifteen years old. Anything older than that, unless it has been recently renovated, will be costly in repairs and upkeep. Older properties typically require more extensive repairs to major systems like roofs, electrical, plumbing and heating, and cooling.
- Look for properties with pitched rather than flat roofs. As a general rule, flat roofs collect moisture. Moisture causes rotting, and rotting requires repair or replacement.
- Depending on your geographic location, look for homes that are masonry block or brick. Wood-framed buildings and wood-sided buildings are more costly to maintain, more susceptible to termite and other damage, and are a higher fire risk.
- Note: Now that we understand the DNA makeup of a property, let’s explore some definitions and calculations that will help us determine the property’s financial makeup. Don’t worry, you don’t have to have a background in calculus! We’re going to do simple math that’s easy to learn and execute.