Investing 101: Know the Value & Understand Your Carrying CostsThursday April 5th 2012
This week we are going to follow some of our key rules to investing in real estate and having the highest return on investment possible! Let's get down to business.
If a property is purchased for $50K over its actual value, you have 50,000 steps to take before reaching the break-even point. Who wants to deal with that? If you are purchasing your investment property with cash, Rule 6 does not apply to you. But for the rest of the investors out there that will need to procure financing or use hard money, be SURE you know all the details of accepting the money upfront.
#5 Know the value and comparables: Before purchasing a property, make sure you understand its value. If you read the previous sentence and you’re breaking a sweat, chances are, you’re feeling a tad uncomfortable with the evaluating game. If it were easy, there would be far fewer instances of overzealous buyers overpaying for Real Estate. Believe me, it happens all the time. It is easy to misjudge values when pulling comparables for a property — it’s not a simple process! Neighborhoods, zoning, traffic issues, parking, etc. can all influence the resell value of a property. What if a new garbage dump is being built a half a mile away, all of the neighbors’ houses have 2 more bathrooms than yours and your property sits on a corner lot? All of these things affect the value- some positively and some negatively. It takes time, experience, and practice to develop the skill set to accurately evaluate a property. If you feel comfortable with the process, great! If not, don’t despair; work with a dependable agent that understands real estate values and variances in today’s market. If possible, take it one step further and work with an agent that specializes in investors — there is a vast difference in purchasing a home to raise your family and an investment property to flip. You always want to take advantage of using professional sales agents that have the knowledge and experience of working with investors day in and day out. If you need some advice, give Heaton-Dainard a call; they have a team of real estate agents that work exclusively with investors and can do a free Comparative Market Analysis (CMA) for any property that you are considering.
#6 Understand all of your carrying costs. We’ve already covered property repairs/renovations and our contractor. Now let’s talk about our other big expense: Cash. Coin. Greenbacks. Regardless of what you want to call it, “cash” or short-term money comes with its own set of costs. If you’re purchasing the property outright with your own, then this is strictly a mental exercise. But if you’re borrowing hard money, be sure you’re well-versed and comfortable with the following: What are the fees involved? How long is the term of the note? Is there a cost for an extension? What if the pipes burst, flooding the property and prohibiting a sale for an additional 4 months? What do I owe then? These are all good questions to ask before you purchase your property. When establishing a budget, it is good to always add a month or two of interest expenses to be safe. It is not entirely uncommon for a project to stretch on for unforeseen reasons.
And here’s a bonus hint: Does your lender give rebates for paying off the loan early? If not, they should! There are many out there that will. Many times it is a good idea to refinance your property immediately into a conforming loan to save on points, interest, and MONEY!