Real Estate Blog

Making an offer on a investment property is much like pulling the trigger on all the work you’ve done.  After researching the actual value of your prospectus and doing the due-diligence on the liens and encumbrances it will be easier to make a offer that will be acceptable to both the buyer and seller.  Hopefully the offer includes the calculated risk of the purchase and the offer is adjusted accordingly.  Additionally, whether it be holding for long term or flipping for quick profit, knowing the exit strategy of the purchase should already be identified and planned before the offer is submitted. 

Two elements of investing that should be addressed when making a offer is whether the property will appreciate quickly or if it would be a good cash flow property.  Most investment properties will be one or the other.  A property that might be in a good area with fast appreciating values is not always a good rental property that will cash flow.  Most homes that have quick appreciating sell for far more than the mortgage to rent ratio would allow, but a good cash flow house will usually be bought for less than the mortgage to rent ratio allots and will increase in value at a slower rate.

Example 1

• You bought a home for $100,000 that you determined the rents are $1200.00 a month and the mortgage payment with a PITI (principal, interest, taxes, and insurance) is $900.00.  After calculating in your management fees, maintenance, rent loss, marketing etc.. you determine that your monthly cash flow is $25.00.  This property will continue to show minimal profit and increase over time, but the value of the home itself will not go up very fast.

Example 2

• You bought a home for $200,000 and the rents for this home were determined to be $1500.00 and the PITI is about $1800.00 a month - as you can see, your already paying more for the mortgage than the rents will bring in.  In this case, the property needs to appreciate at a fast rate, otherwise you will own a alligator that will eat you alive in debt.  We didn’t even calculate in your management, maintenance, rent loss, marketing etc.. so realistic expectation should be a negative cash flow of possibly more than $500.00 a month.  

From these examples, both can make an investor money, but understanding whether the investment will appreciate or cash flow is very important.  For this reason alone, investing is not something for the faint of heart to try to do.  There are things that can and will go wrong on every purchase - being prepared and calculate your risk ahead of time to help prepare you for these potential problems.