TAO of Flipping and Investing in Real Estate - Part 4.1 - Criteria
Author: Scott Hurst
When buying an investment property, there are two things that must be immediately considered–Are you going to hold this property for long term cash flow OR are you planning on doing rehab and selling it for profit? Both require knowledge of understanding how to purchase a property for the right price and we are going to duscuss this today.
Lets think of real estate invest as being a cake. To make a good cake you need two things — the ingredients and the directions. Real estate investing can be looked at in much the same way. If you want to make money in real estate, create a cookie cutter way to make your purchases and apply this to your offer and sale. In part one, we talked about the six things that you need to know before purchasing a property, in parts 4.1 - 4.6 we will concentrate on: How much is this property worth if it were in perfect condition, how much is the property taxes and insurance on this property, how much to deduct for maintenance fees, rent loss, and management fees, how much will it cost to repair the property to make it move-in ready, how much would the property rent for after repairs and LASTLY, how much do I offer for the property?
We will be going over these six parts during the course of this series, but today will start with determining the value of the property. This is the most crutial part of learning how to invest in real estate because if you do not know what your buying, you will not know what its value is and in turn either lower your profit margin or worse — take a loss. To determine this, we have to account for the location, age/dillapidation, size, ammenities and lastly comps. Using these factors will help us determine a good value for the property based on rent ready condition. This is what we would like for it to rent or sell for on the open market.
In determining quality of location, you may need to drive the neighborhood many times over a week or two and see if it has any faults that may be accounted for in your purchase price. Just because a property may not be in the best part of town doesnt mean it is not worth looking at. Everyone needs a roof over their head, and the rich and poor aren’t different in this aspect. Account for the quality of the neighborhood in your purchase price, but do not discard a property just because of the area.
The age of a property is important for two reasons; it may need extensive repairs if the roof, plumbing, foundation, and hvac are reaching that ten year threshhold and secondly, it’s value is not comparable to a new or near new home. I really like to look at older properties because this is where you will see a lot of owners with homes that are paid off, or have a lot of equity built up. With equity and full ownership comes better deal making; you may be able to work more with the owner on a better offer if they do not have a mortgage or lean on the home. Additionally, if there are significant repairs needed, you will be able to discount the property to account for the repairs and labor you will incur. Not all older homes are a great buy, but keep your eyes out because they are more prevelent than finding great deals in new construction.
Many people believe that the bigger the house, the better the deal–this is not always true. In fact, the majority of buyers and renters are looking for a median house size of 1700 square feet with three bedrooms and two bathrooms. A two car garage is the next thing that most people like to see after they have met the fore-mentioned criteria. This should be your bread and butter and this criteria will bring in the most buyers and renters. It can sometimes be difficult tweaking your criteria for determining what buyers like, but I have found this to be a great starting point. Once you have determined the size, you will then be paying close attention to the ammenities that the target house has.
Pool, Jucuzzi, sun room, tennis court–these are some things that can either increase or decrease the value of any target property. Knowing how to determine their value and apply it to your offer price is where all that homework you do on determining the value of ammenities will come in. It is imperative that a person that is learning to invest spends as much time as possible learning what things cost. Knowing the price difference of laminate wood flooring and brazillian hard wood flooring can be many thousands of dollars in difference. Learn what things cost, so you can make a viable offer and save yourself some money in return.
After you have done your homework and know as much about the porperty as possible, it is time to do your comparables. This is when we will look int he paper for homes int he same area and subdivision and see what they are selling their house for or calling the owners that we find listed on sites such as craigslist.com and realtor.com. You will be surprised at how easily you can get owners to tell you how much their house is listed for; they are in fact trying to sell it, so this information will be expected. A popular and more accurate way to get comparables is by locating a real estate agent that is familiar with the market area you are concentrating in. Take them to lunch, talk to them about your interests, you will be surprised at how interested they may in turn be in you!
In the next part, we will be discussing the taxes (yikes!) and interest that you will be responsible for, how it applies to your purchase, and why it is a important factor in your offer. Class Dismissed!