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Economic Considerations Of Purchasing Smaller Investment Properties

While most larger, real estate developers, consider the Return on Investment, or ROI, before committing to a specific project, in many cases, those purchasing smaller, investment properties, often, seem, to fail, to do so, with the same degree of attention and focus. For the purposes of this article, this will refer to properties, with 1 – 6 units, and residential use. Many, instead of following this process, look at these buildings, and property, in a similar way, they perceive, buying their personal home! It is, however, important to realize, wise investors, recognize and understand, an economic, Return on Investment, mindset, to determine, whether it is a wise investment, or not. The same rules apply, basically, whether, the rentals, will be, stand – alone, houses, or up, to 6 units. With that in mind, this article will attempt to consider, examine, review, and discuss, some basic steps, to consider, before closing, on any deal.

1. How much to spend for the property: A conservative approach, to considering, the right price, to spend, must be, considering the total price, as it relates, to the net, rent – rolls. For example, an investment property, purchased for $500,000 must generate a net income, of, at least 6%, per year, or $30,000. The net, is derived, by considering total rent rolls, minus 20% to provide, a reserve for vacancies and turnover. Then, reduce this by the expenses, including the fixed ones, such as taxes, mortgage interest, landlord – paid utilities, and a reserve for repairs, renovations and upgrades. Therefore, if taxes on that property are, for example, $8,000, and utilities, $500, and mortgage interest, another $6,000, and you put away, 1% a year, for reserves ($5,000), then, you must add, $19,500, to the equation. Therefore, you will need a total rent – roll, after the 20% deduction, of $49,500 per year (or slightly over $4,100 per month). Therefore, the total rent collected, each month, should be approximately $5,166 (because you’ll need to budget, based on approximately, $62,000, to create a safety – net, to protect against vacancies, etc).

2. Cash flow: Seek a positive cash flow, so, owning these types of properties, are, as stress – free, as possible. Compare the combination of your mortgage payments (including interest and principal), plus real estate taxes, and maintenance/ repairs/ renovations/ up – keep, costs, to whether you are staying within the 80% of rents, limitations.

3. Competitive approach: What is the prevailing/ typical rent charged, in the specific area? Rather than focusing on being on the high – end of the market, the better approach, often, is being in the middle, to bottom range, and seeking lesser turnover.

4. Turnover: The best scenario, is meeting revenue needs and projections, while controlling expenses. The lower the turnover of tenants, the lower a landlord’s costs.

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More Advice for New Real Estate Investors

What advice would you give to a new investor?

1. Find a coach/mentor in your area to whom you can turn for guidance. Most importantly with anyone you turn to, make sure they are successfully doing what you want to do and talk with others they’ve helped before you make a commitment of your time and/or money.

Real estate investing is not a solo business. You need attorneys, CPAs (knowledgeable in real estate investing), contractors, sub-contractors, real estate agents, title companies, closing attorneys, inspectors, appraisers, on and on. Find someone who’s walked through the mine field before you and can give you a hand to save you both time and money.

Should you pay them for their time? Absolutely. If they’re willing to share with you what they’ve learned over years of their own time and efforts, they’ve paid for their skills one way or another and what you will gain from them is worth paying for. If they’re not worth paying, they’re not worth following.

And don’t reach out to only your peers; reach out to those in a better position than you. Jim Rohn said, “you are the average of the top 5 people you hang around with.” If you want to get better in any area, find someone to follow who is doing way better than you are.

2. Get involved with a peer group that knows more than you. Go to all the meetings you can. For real estate investors, that typically means local REIA meetings (real estate investor association meetings which you can find on NationalREIA.com). Also check out MeetUp.com and any local landlord association meetings. Landlords are already doing the business and can be a great source of information as well as potential buyers and sellers to work with.

3. Set goals. Make a plan. How many houses do you want to buy in the next 12 months? How much do you want to be worth in 5 years? As you write out your goals, include strategies for accomplishing them. Want to buy 10 houses in the next 12 months? Break that into pieces to figure out what you need to do every month to make those goals a reality.

4. Buy real estate. If you haven’t started yet, start! If you’re buying, buy more. If you don’t, 10 years will have passed and you’ll be kicking yourself for not buying all you could today. The way to truly learn is by doing. Books and seminars are great, but you won’t know what you know and what you don’t know until you jump in and start buying for yourself.

It’s a worn out cliché that “there’s never been a better time to buy real estate”, but it’s true. I believe it’s always true. Sure, you have to adjust your methods and your strategies depending upon the economy and where you invest, but everyone works, shops, and lives somewhere. If you don’t own it, someone else will.

Get an education, hook up with a mentor, make a plan and buy real estate.

When Making Your Offer to Purchase – Don’t Think for the Seller!

There are a lot of questions and concerns regarding how to present an offer to a seller. As real estate investors, we usually present these offers ourselves rather than using real estate agents, so it’s important that you learn how to negotiate and how to be confident when presenting.

I’ve written in the past about negotiating with a seller. But before you present the offer, what you need to know above all else is the maximum you can pay for it!

In order to come up with that maximum number, what you need to know is:

the true value of the property
the cost of repairs
your costs to hold and/or sell the property

all of which will allow you to calculate how much you can pay for it.

Once you know the amount you can pay for the property, that’s the amount you can’t go above. So when negotiating, there is absolutely NO reason to be concerned with the seller’s equity position, how much the seller owes. You cannot allow that number to impact what you offer AT ALL.

Now, don’t get me wrong, it’s very important to listen to all the seller has to say. It’s important to build a relationship with the client as they share their situation and you work to craft a solution to their problem. But their problems can’t become yours. You want to help them out, certainly, but you can’t let their needs raise your offer price. Your offer is based only on the maximum amount you can pay.

When it turns out that they owe more than what you can offer, and it often does, that is a situation they have created and that they have to deal with, not you. If you want to stay successful, you can only offer what your numbers work out to, which is why you must know the maximum you can offer before you begin the negotiating process.

What may surprise you is that many people accept offers far less than what they owe. They eventually find all manner of ways to come up with the funds needed in order to sell. Don’t believe me? Contact any closing attorney and ask how often the seller brings money to the closing table. It’s not uncommon.

So, don’t think for the seller. Don’t ever “assume” you understand their position, or what they can do about it, or what they are willing to do about it, or what they already knew they’d have to do before you even showed up. In fact, when determining your offer, don’t think about their needs at all. Focus only on your own realities – your true numbers as laid out in paragraph 2 above – and stick with that. If it works for both parties, you have a deal. If it doesn’t work, you part as friends and move on to your next offer.

You always want to help the seller but most times you can’t. Don’t get emotional about your offer; this is a business. There are plenty of people out there that you can help so don’t let one property take you out of the business.