Identifying the investment property and completing the purchase.
Deliverable 2 focuses on identifying the investment property and completing the purchase. For this deliverable, you will seek out your ideal investment property, evaluate comparable properties, and make a competitive offer for the property. As part of the identification of this investment, you will need to outline your plans for the property, identify and price out any necessary building or renovations needed, and determine the anticipated value of the property.
Research properties for sale and choose a property that matches the criteria including price point. Save the listing as a pdf or screen shots so that you can refer back to all of the information for the property. Should the property be sold or taken off the market over the next 4 weeks, you will no longer be able to access the web listing…saving this information will be essential for your project.
Determine a plan for this property. Will it be a rental, flip, development, etc.?
Identify three comparable properties to the property you want to invest in. Comparable properties should be the same classification (commercial/residential), have similar number of units, similar location, similar size, etc. Determine the offer price you would make for this property. Ensure that the purchase price will fit with your plans. For example, if you are purchasing a residential building to lease, apply the 1% rule. Will you be able to realistically collect 1% of the investment price (purchase plus renovations) for your rents?
Will this property require renovations, development, or other changes? Outline what will be required. What is the proposed ARV (after repair value) based on comparable properties after you have made these changes?
Create a pro forma cash flow statement for your chosen property. This should cover the length of time you plan to own the property, or 3 years (for buy and hold). Include information on purchase price, mortgage payments, expenses, renovations or development, and income for the property. Does your property cash flow?
Identifying and Evaluating an Investment Property
Property Selection
Property Type: For this example, let's assume we're interested in a residential rental property in a growing neighborhood in Kisumu, Kenya.
Criteria:
- Price Point: Targeting properties within a budget of KES 10-15 million.
- Location: A desirable area with good schools, amenities, and potential for rental demand.
- Property Condition: A property that requires moderate renovations to increase its value.
Selected Property: A 3-bedroom, 2-bathroom house with a backyard in a popular neighborhood.
Comparable Properties
Three comparable properties were identified:
- Property A: Similar size and location, sold recently for KES 12.5 million.
- Property B: Slightly larger, in a more desirable area, sold for KES 14 million.
- Property C: Smaller, in a less desirable area, sold for KES 10 million.
Offer Price: Based on the comparable properties, I would offer KES 11.5 million for the selected property.
Investment Plan
Renovations:
- Kitchen: Update appliances, cabinets, and countertops.
- Bathrooms: Replace fixtures, tile, and vanities.
- Interior: Paint, flooring, and lighting.
- Exterior: Landscaping, repainting, and minor repairs.
Estimated Costs: KES 2 million
ARV (After Repair Value): Considering the comparable properties and the estimated value of the renovations, the ARV is projected to be around KES 14 million.
Cash Flow Analysis
Assumptions:
- Rental Income: KES 30,000 per month
- Mortgage: KES 100,000 per month (assuming a 20% down payment)
- Expenses: Property taxes, insurance, maintenance, and management fees (KES 20,000 per month)
Pro Forma Cash Flow Statement (3 Years)
| Year | Rental Income | Mortgage | Expenses | Renovations | Net Cash Flow |
|---|---|---|---|---|---|
| 1 | KES 360,000 | KES 1,200,000 | KES 240,000 | KES 2,000,000 | KES -2,000,000 |
| 2 | KES 360,000 | KES 1,200,000 | KES 240,000 | 0 | KES -120,000 |
| 3 | KES 360,000 | KES 1,200,000 | KES 240,000 | 0 | KES -120,000 |
Analysis:
Based on this pro forma, the property does not generate positive cash flow in the first three years due to the initial renovation costs. However, the ARV suggests a potential for significant appreciation.
Additional Considerations:
- Market Trends: Analyze rental market trends in Kisumu to assess the long-term viability of the investment.
- Tax Implications: Consider tax benefits such as depreciation and rental income deductions.
- Risk Assessment: Evaluate potential risks, such as tenant turnover, property damage, and economic downturns.