Investing 101: Stick to Your Price & Exit StategiesFriday April 6th 2012
Yesterday, we covered Rule #5 and Rule #6 of the “10 Rules to Follow When Purchasing an Investment Property.” Now you understand the importance of knowing the value of the home and its comparables (Rule #5), as well as clearly understanding all of your financing carrying costs (Rule #6). Both are crucial for turning a profit on your investment property.
Just like the previous rules, Rule #7 and Rule #8 should be done well in advance of purchasing a property. You should always approach a buying situation with a "magic number in your head. If you cannot secure the property at or under the "magic number,” then you’re out of the game before you even got in. GET OUT. Do not pass Go. Do not collect $200. Exit Strategies should be approached in the same manner. This is not something you want to figure out down the road. Having a plan will save you bacon every single time!
Rule #7: Stick to your price. The most common mistake that beginning real estate investors make (and let’s be honest, seasoned ones as well) is paying too much for a property. In a competitive market, investors can become frustrated and rush to get into a deal. The investor that possesses self-control and patience will be rewarded handsomely in the end. Have confidence that you will find the right property for the right price with due diligence. Always remember that overpaying for a property is a much worse scenario than missing out on the property entirely.
If you purchase an overpriced property, you must cut project costs somewhere else. Whether you need to lower the quality of improvements or leave off the half bath needed for additional profit, this is not a fun decision to make. Do yourself a favor and set your highest price up front. Stick to your guns and walk away if necessary. A rash decision can turn into a very costly mistake later. Whether you are purchasing a bank owned property, a straight sale on the MLS or bidding at the auction, don't make the mistake of getting caught up in the moment just to “win” the property. Sometimes the “winner” turns into the biggest loser.
Rule #8: Exit strategies. As discussed earlier, sticking to your purchase price is important for your bottom line. Once you know the end point, work back to your beginning purchase price. A savvy investor positions the investment property for several exit strategies in case one falls through. Let's say that you find a 3-bed 1-bath rambler in a great neighborhood that has solid bones, but it needs some cosmetic work as well as an addition of a full bath to achieve its maximum value. You are familiar with the comparables in the area and you are confident that there are a few exit strategies available. Let's take a look at some of your options:
1. Make the renovations based on what the neighborhood dictates. Sell the home for a tidy profit and move on to the next project.
2. Rent the property at market price for cash flow.
3. Lease Option the property. This provides a non-refundable option fee up front, higher than market rent and a potential buyer. If they don’t buy the place, no worries; just rent it again and keep the fees.
4. Sell the property and seller finance all or a portion of the home.
Each of these options is viable depending on the details of the deal. Need some advice or have questions? Give Heaton-Dainard a call – they have the expertise to help you pinpoint several lucrative exit strategies for your investment property.