The Anatomy of a Rental Property

Tom Van Horne • August 22, 2024

Rental properties come in many shapes and sizes, all with different benefits. For us, we like to focus on single family, or small multifamily homes (1-3 units) when analyzing and looking for our next deal. When you’re an investor, it’s important to identify your niche, this allows you to develop a common operating procedure. A rental property for us has three major criteria that we look for in identifying our next investment.


NICHE CRITERIA
   ➢ Cash Flow
   ➢ Strong Rental Market
   ➢ Student, or Professional, or Long-term tenant

You’ll see that we identified three criteria above, let’s put them together in a sentence to create our niche rental property. ​


THE NICHE:
Multi-family Student Rental property, in a strong rental market,
​that generates a monthly cash flow of $750.


​Now that we’ve got the anatomy for what we’re looking for, let’s break down the other pieces that make up the process side of things. It’s important to be specific when identifying your niche, let’s continue the discussion and look at how we analyze the first piece of criteria: Cash Flow.


CASH FLOW ANALYSIS
This is arguably the most important factor in defining your rental property’s anatomy. Most investors will be able to identify a good market and a nice property but, don’t forget to perform your cash flow analysis. Running the numbers on your rental property doesn’t need to be complicated. An excel spreadsheet and an hour of your time can go a long way in having a standardized template for analysis. Once you’ve got your template, analyzing a property that meets your cashflow criteria shouldn’t take longer than a few minutes. Here’s a look at how we analyze our properties:


In our opinion, every rental property anatomy should come with a cash flow analysis, project plan, and an idea of what your hold period and exit strategy will look like. These are documents that will make your rental property strategy much less complicated, especially if you’re investing with partners.


Now that we’ve clearly defined some pieces that make up the anatomy of a rental property. Let’s look at how real estate investing can create, as well as generate wealth.



THE FOURT WAYS AN INVESTMENT PROPERTY GENERATES WEALTH

Real estate investing allows investors to create, as well as preserve, their wealth through the income producing property. There are four main ways that this happens, let’s take a deeper look at each one below.



➢ Debt Paydown

This is what happens when the mortgage payment is paid as per the assigned schedule with the bank. When you collect rent cheques to pay down your mortgage, this is how wealth is created. If you look at the amortization schedule to the right you can see how over a 5-year period you can generate strong returns just by having rental income pay your mortgage for you.




➢ Sweat Equity

This is the process of adding value to your property through a renovation strategy. This is your project plan, and the hard yards you have to put in sometimes (especially in competitive markets) to make your investment make sense.


➢ Cash Flow

We looked at a cash flow analysis earlier. This is the amount of money left over each month after all of your expenses are paid and you have also made your mortgage payment.


➢ Appreciation

In real estate refers to the increase in the value of a real estate property over a period of time. One of the goals of investing in real estate is to get a positive return on the investment when the investor decides to sell the property in the future.



RENTAL MARKET ANALYSIS

The last piece of our real estate investment anatomy that we will explore in this post is the rental market analysis. That is, how to identify a strong enough rental market to plant your investment seed. This doesn’t need to be complicated but it is something you should be able to quantify as well as qualify. Let’s look at things like:


➢ Vacancy Rates

A strong rental market will have a vacancy rate at about 5%, this is to say that of all rental property’s and homes available, only about 5% of them are vacant. A good risk management strategy and investment strategy will consider these numbers.


➢ Minimum Wage

When identifying rental markets, a good indicator is affordability. The way you identify if the rental rate you want to charge is affordable is to take a look at minimum wage in the province of Ontario. The average person spends about thirty percent of their income on shelter so take that into consideration as well.


➢ Employment Rates

Jobs are a good indicator of a strong rental market. If there are plenty of employment opportunities in the city you’re investing in, you’ll likely find good tenants. Another indicator of this can be Universities and Colleges, as students will come in seeking education to get those jobs.


➢ Immigration

Understanding where the flow of people coming into the country helps to identify a strong rental market.


Your rental market analysis does not need to be overly robust, but it is something you should include in the anatomy of your rental property. We like to use the factors above as well as talk to people who have had experience investing in these markets in the past.



​CONCLUSION

​​The anatomy of each rental property may be a little bit different but, having an understanding of what goes into each one can help. Let’s review one more time what we covered today.


➢ Anatomy of a Rental Property

The criteria that makes up your investment. This is defined for us as the niche, this is when we talk about the cash flow analysis, rental market conditions and the tenant profile.


➢ The Four Ways Real Estate can Generate Wealth

These four pieces are very important to monitor as this will be how you generate, create and preserve your wealth.


➢ Rental Market Analysis

Understanding the city where you are planting your investment is crucial. We identified some key factors in making this decision, take a look at vacancy, employment, and wage rates during this decision.


In conclusion, each rental property is different. They will all contain their own opportunities, strengths, weaknesses, and threats and it’s important to identify and analyze the anatomy of each rental property you consider. Understanding how these properties work is the way to truly gain a more comfortable risk tolerance for what can be a great investment.