While 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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