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Crunching The Numbers- "Late 2008" Style

By
Real Estate Agent with Chuck Willman 9334967-SA00

Monroe Vintage Ad- Public DomainWhile buying my first car, the salesman said, "let's crunch the numbers."

I don't know why, but this phrase has never induced any sort of comfort in me. It's a cringe-worthy phrase that sounds like it comes straight from a salesman's seminar.

However- "knowing" the numbers is essential to any buying experience. No one wants to make a financial decision without knowledge that the purchase will be a sound one.

Until recently, "Crunching the numbers" has not been an overly difficult exercise.

When I work with people who want to buy investment property they tend to have a small set of potential goals. Among them are:

  • Positive Cash flow- Their income from rents exceed their "outgo" of expenses.
  • Equity "Upside"- Property that could potentially increase in value.
  • Depreciable Asset- Property with tax advantages.

Typically history helps us establish some comfort level. Lately the the numbers and charts are less reliable. I have found that many investors feel that the upside-down market must be offering some kind of investment opportunity but, where? The bigger question is this: How do we properly assess value?

Short of being granted the ability to predict the future, here are a few additional items to take into consideration:

Recent Activity- It's essential to know the current activity in any target neighborhood. Though some will tell you they have a "gut" for the market I would challenge their gut to look at the recent activity. In light of the current market challenges, some neighborhoods have retained a strong value while others have slid tremendously.

Cost per Square Foot- Many people like to purchase properties that are lower than the median cost of similar properties in a region. This may be too simplistic. I like to look at the cost per square foot. I feel it offers a better comparison. Some investors have a target cost per square foot... unless a property falls to a certain price, they're not interested. When the cost per square foot goal is achieved we then compare it to current market and recent activity. You want to be significantly lower than the market.

Replacement Cost- What would it cost to build this house/condo/townhome/apartment complex? Surprisingly, some properties can be purchased today at a lower-than-replacement cost.

Fix-Ups- Unless you're very good with cost estimates, try to avoid homes that appear to be easily fixed. This is one area best left to experts.

It's true... there are many opportunities out there. Be sure to bring your calculator before executing the contract.

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Chuck Willman is a real estate agent based in the Phoenix Metro area. He is also the founder of AZvest, a group of investment minded individuals who make their living in real estate.

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PhotoCredit: WellMedicatedAds

Comments(8)

Debe Maxwell, CRS
Savvy + Company (704) 491-3310 - Charlotte, NC
The RIGHT CHARLOTTE REALTOR!

Chuck:  Excellent investor advice!  Let's see, I'll have some positive cash flow with a little equity upside and will can you just get us through this 2008 year?!

Debe in Charlotte 

Oct 14, 2008 01:41 PM
Pam Pugmire
Silvercreek Realty Group - Meridian, ID
Meridian Idaho Real Estate

This is a great list Chuck! 

I've found many buyers looking to purchase their own personal residence following the same parameters (minus the positive cash flow ).  They are very price sensitive, because most people realize that we are still in a declining market.  You need to purchase at below market value today to be even tomorrow. 

Oct 14, 2008 04:11 PM
Susie Blackmon
Ocala, FL
Ocala, Horses, Western Wear, Horse Farms, Marketing

You've given me a great cheat sheet!  Positive cash flow... hard for me to spell at the moment.

Oct 14, 2008 08:09 PM
Debbie Summers
Charles Rutenberg Realty - New Smyrna Beach, FL

Hey Chuck...  I wish everyone would check your list first, most folks don't understand positive cash flow until they are in Negative cash flow.  Great advice for the investors out there.

Oct 15, 2008 09:08 AM
Robyn Guinn
StageAZ - Phoenix, AZ
Home staging, Arizona

Excellent info but I'm really sad.  I remember the box looking calculator that's in the picture.  It was the greatest thing since sliced bread at the time! 

Can you really use the comp feature on the new flex MLS?  Seems like you need more info than what it supplies.  Just curious.

Oct 15, 2008 06:12 PM
Chuck Willman
Chuck Willman - Alpine, UT
NewHouseUtah.com

Debe- These are interesting times for investors. Of course- it takes some good research.

Pam- The worry over the future is huge... it's nice though when buyers don't have to think in terms of investment and only have to apply affordability as a major concern.

Debbie- Yes... not a big fan of negative cash flow. :-)

Robyn-The huge calculator was thrown in as a treat for those of us who remember them as space-age devices. The new comp feature? Yes... I can use it... but it took some time, my goodness- me-oh-my.

Oct 18, 2008 11:19 AM
Robyn Guinn
StageAZ - Phoenix, AZ
Home staging, Arizona

it's nice though when buyers don't have to think in terms of investment and only have to apply affordability as a major concern.

oooooh I like that, folks should have been thinking that way the past few years, we may not be where we are now.  Hindsight right?

Here we go again though.  Thinking in terms of investment......

We just bought a foreclosed property, a fixer upper. Bought it right, potential upside for flipping is the goal. However like a lot of properties out there, it's a mess and lenders probably won't lend on it until it's up and running and habitable.  So I guess, we get the so called hard money loan, you know, high rate, interest only, for 6 months.  Fix up, do up what needs to be done, stage it or course...... and sell right?    OR- is this now the time to fix it, get permanent financing, rent it out for a year or two, then sell?

So if you could polish your crystal ball as to what most of your investers are doing now.....I'm on the fence as to which way to go.  A mug wump you might say, mug on one side and wump on the other.

I also get concerned about lenders limiting to only 4 properties financed, as we want to do more than that. Is there a solution?

Oct 18, 2008 11:45 AM
Chuck Willman
Chuck Willman - Alpine, UT
NewHouseUtah.com

Robyn- It really depends on 1) the area and 2) your investment needs. If the area has major potential for equity gain (areas in which values have declined at a less steep rate) then many investors are renting and holding a few years. If your rents are covering the bills and you're able to hang on, that's a good way to go. You could also treat it like a wholesale property... fix it up enough so that an investor would want to finish it. I have a few clients who are doing this right now. It's less of an emotional decision-you're basically looking at the profitability of the short term vs. the long term. Wholesale profitability is short term of course. With regard to the four property minimum, it's good to work with groups that know how to help you create legal entities, trusts, etc. I can put you in touch with great professionals to help you out with this.

Oct 22, 2008 05:20 PM