As an investor, how do you make your offers? There are so many deals out there today but, are they really deals? If so, why hasn’t someone else snatched them up?
Here are some beginning pieces to consider when you’re ready to buy:
1 – Equity: Will it have any? Most homes today are selling at 10% or more below market value. Personally, that tells me that market value is actually 10% less than we’re saying it is… If I can buy a retail house at 90% of market value, that is not enough of a deal for me to consider it a good one. My suggestion is that you expect to get at least 20% off what is considered market value to know that you have equity. In fact, that works here in North Carolina where our values haven’t dropped much, but may not be enough of a cushion yet in places like Arizona or Nevada.
At any rate, you don’t want to pay more than 80% of what the home will be worth after you’ve repaired it. For example,
for a house valued at $100,000 you would pay only $80,000. If it needs $10,000 in repairs, you would only pay $70,000.
2 – Cash Flow: Before you buy, you must know what all costs will be to own this property. Typically, these costs include the principle mortgage amount, interest, property taxes, insurance (PITI) and homeowners dues (HOA). If your mortgage rate is adjustable, figure worst case scenario – what is the highest it can adjust to and what will your monthly payments be at that point?
Next, figure what you can rent it for per month and make sure you can rent it for at least $200 per month more than your real costs. We consider $200 per month profit on a property break even. You can adjust that number a bit depending upon the price of your home but this works at and around the $100,000 value.
3 – Location: We prefer to buy in areas with good school districts because schools are important to most buyers. Remember, even if they don’t have children, it will be important to your buyers when they are ready to re-sell. Is the home near shopping and freeways? Is it near industrial parks? Is it under a flight path? If possible, check out the property at different times of the day and the week.
Why are these 3 important? Equity in case you need to sell quickly. You never know what life circumstances can throw in your path. Cash flow so you can afford to hold it and do the maintenance and repair it will need over time. And location so that you can more easily rent it and sell it in the future.
Now, go make some offers!