How to Spot Value in Real Estate Investing

Learning to identify a potentially profitable keeper probably will take some time if you are new to the real estate game. Some buildings that look like keepers are not, while others that don't appear to be good investments can be. You can't judge a property by its profit-and-loss statement alone. It's not unusual for a keeper to operate in the red. If the negative cash flow is not too severe, the loss shown annually doesn't have to rule out the building. You must look at all angles of a property when you plan to retire with it in your portfolio. It's certain that you will have expenses with buildings you keep for a long time, and this is also something you must consider.

Because investors will hold their keepers for a long time, the buildings must possess certain qualities. A property's potential is the first element to consider when looking for a keeper. You must evaluate present conditions, but future possibilities are also important in retirement properties. Let's say, for example, that you are considering the purchase of an apartment building whose heating system consists of a huge steam boiler and old radiators. This might not concern you if you were looking at the building as a quick flip profit opportunity. Neither might the outdated heating system bother you if your plan was to sell the building in five years. But an antique heating system in a building that you will keep for decades should be a red flag of financial danger. You know that eventually you will have to replace the heating mechanisms. Estimates from heating contractors indicate that the cost of converting the old steam system to a modern setup will be steep. Maybe you should pass on the property and opt for a more modern building. Either way, steam heat is a good example of one potential problem to look out for.

A building's roof also could present some problems. For example, a slate roof is durable and can last for a long time. However, repairs to slate roofs are expensive, and replacing them with asphalt shingles can be extremely costly, due to the removal of the slate. Also, a building with a flat roof likely will give a landlord more trouble than a building with a pitched roof. Buildings without gutters or other storm drainage facilities may have leaking or damaged foundations. While many construction features don't affect a building's short-term ownership, the same issues can be major problems for long-term investors.

Construction details are not the only things to consider when shopping for keepers. Check a building's history before you invest. Has it had good tenants? Was the vacancy rate high in the last ten years? Does the building house subsidized tenants? Does it meet the criteria to house subsidized tenants, or will it need improvements to meet those standards if you choose to run a subsidized building? Who has managed the property over the last several years? If you find that a landlord has gone through a long list of management companies, investigate the reasons for the turnover; it could indicate a problem building. Check old tax records to determine whether the building's value has escalated in recent years. Run a check on comparable buildings that have sold over the last five years. Compare the sales information to determine whether values in the area have appreciated regularly. Dig deep and find out all you can to help you evaluate the building for stability and growth.