Investing 101: Knowing Who Your Competition Is & Don't Fall in Love with the PropertyMonday April 9th 2012
Last week we covered Rule #7 and Rule #8 of the “10 Rules to Follow When Purchasing an Investment Property.” The importance of sticking to your price (Rule #7) as well as knowing what your exit strategies are (Rule #8) are crucial for turning a profit on your investment property.
As with the previous Rules, these next two can and should be done well in advance of purchasing a property. When evaluating your property you must clearly understand your competition. Is the neighborhood littered with bank owned properties that need a ton of work or are they top of the line properties that will fetch the highest price? You must remain level headed about the property and not “fall in love with it.” This is not your home. There is no need to upgrade to the top of the line granite you found last night on Pinterest just because you “really like it.” All you want to do is upgrade the house to the highest standard of your immediate market and sell it. This is all about bottom line. You are not living here. Keep your eye on the prize: the return on your investment!
Rule #9: Know who your competition is on market. As discussed previously, knowing how to comp out your property as well as accurately identifying your market competition is mission critical. If the entire neighborhood is comprised of empty nesters selling their family homes they have lovingly maintained for 20 years, it’s probably a fair bet that the bombed out REO you just bought needs to have all the bells and whistles that they have in their homes in order to be competitive. However if the neighborhood is a mixed bag of starter as well as more opulent homes, then upgrade the 2-bedroom 1-bath 1200 square foot property you just purchased to compete with the starter homes and you will be sitting pretty. With that size of property, you cannot compete with the 6-bedroom larger estate two blocks over; even if you pull out all the stops in the kitchen and drop in a Viking range, double ovens and a sub-zero Wolf refrigerator. Save yourself time, cash and identify your competition upfront while establishing a solid game plan.
Rule #10: Don’t Fall in Love with the property. I cannot even begin to tell you how often I see a love affair bloom between a new property flipper and their very first rehab. This is a money making opportunity, pure and simple, and it should be treated as such. The upgrades made to the property should be only enough to fetch the highest selling price. There is no need to get creative with upgrades or make costly and unique architectural changes to the property. Not only do they cost more but they also increase hold time eating into even more of your profit. Even though there could be a dozen “really cool” things that could be done to the property, the fact is, it doesn’t matter. Notice I called the house a “property” not a home. Think of your flip in those terms and you won’t ever go astray. If you plan on doing multiple flips, pick a punch list of attractive items that you repeatedly reuse in each property. It takes the guess work out of the equation. Or if you find yourself buying in different types of neighborhoods, consider a couple of options based on the quality and upgrade. For example, if redoing the countertops in the kitchen, use the same granite or Corrine countertops each time. The same cookie cutter approach can be applied throughout a property even down to paint color, bathroom fixtures and cabinet handles. Using this approach does not make a property any less appealing to the prospective buyers, it just enables you to work your bottom line in your favor.
Need some advice or have questions? Give the experts at Heaton Dainard a call. The team has completed hundreds of transactions and can give you assistance on choosing upgrades that are desirable and will appeal to a wide range of buyers.
Visit www.heatondainard.com for more information.