Previously I posted How to choose the right investment Property - Know what you are doing - part 1
This provided 8 steps of the process - this post will go over step 1:
1. Know your goals - Is your goal resale ? Long term buy and hold ? Immediate cash flow ? Income ?
There are numerous benefits and advantages of buying and selling real estate. I think it is critical for an investor to have well defined goals in the beginning of the process to help them gain focus on what they are looking for. Once one has focus, many types of properties can be eliminated right off the bat.
Thus, why are you looking to own real estate ? What benefits are you looking for ? Is it simply just to make money now or is it more of a longer term building weath strategy ?
Basically, there are 2 key components of owning real estate - appreciation and income .
Appreciation - this is the goal of the resale or the "flipper". Buy a property low, fix-up and sell and make a mint !!! Similar to the stock market, buy low and sell high. The short term investor will look to resale the property immediately. The longer term investor will hold the property for the longer term appreciation and will not realize the gains until that time. For the short term investor is great if it works but comes with much more risk which is discussed below.
Income - this is the goal for the investor looking to generate income each month and year. This is the standard investment property that each month brings in more money than what the monthly expenditures are (mortgage payment + insurance + taxes + insurance + vacancy factor). If an investor nets $400 a month from one of these properties and owns 20 of them, making $8,000 a month in income is not bad. The income generating properties can range to a single family property to multi-family to mixed use or commercial. The mistake that some of these investors make is miscalculating either what the rental income will be or what the debt financing and other expenditures will total.
So if the goal is immediate appreciation, know that you better get a great deal right from the beginning. Basically your money will be made when you purchase, not when you sale !! My major gripe is that all the "flip your house" shows will show the rennovation and the sale but NEVER how they procured the property. That is where the money is made !!! The best examples are getting a great deal on the property, basically do nothing besides having it cleaned up (or cleaned out for a shell) and putting it back on the market with little rennovation at all ! If you pay too much for the property, it does not matter what type of rennovation you do, if you are into the property for too much money, you will lose money on the out.. period.
Time and time again, we run into the investors that want to sell their property for a number that does not make any sense.... and they will moan "But I paid $XXX " or "I put into it $YYY ". So what ? I did not tell you to pay that amount or consulted you in your rennovations or planned the exit strategy for you. The best way to get the good deals is to have a superior buyers agent (or two) for the area you are interested in. The buyers agent will be your consultant for what to pay for a property and what it can sell for in the end, conservatively ! Also, it is important to have access to bank owned properties or real estate owned properties. Put out ads for "cash for homes" in various local papers and so forth. Have your agent watch the MLS like a hawk for good deals, estate sales and the like. And when a good deal comes up, offer strong with little contingincies and a fast settlement. When the great opportunites come up, you have to take advantage of them.
This approach is for the longer term investor, and in my opinion, the savvier investor in these market times. This approach is much less risky and allows for the real estate market to work its magic and do its thing over the long term. A good example of this is look at the stock market. If one were to have got in on the GOOGLE "GOOG" IPO, they could have flipped the stock at the open and made a good chunk of change. Nothing wrong with that ! However, the investors that held onto stock made 5 to 10 times the profit than the flipper !!! Same thing can and will happen in real estate as well !
Further, there is little pressure to get that great deal right off the bat although it is always a good thing. There is less risk that one has to sell a property for a loss or not have the rental amount cover the debt service costs of the property. When these types of investors look at a property, they do not look at how much money can be made when it is resold now, they look at how much income it can bring in each month and year and compare that income to the property's expenses. If the cash flow positive results hits the goals of the investor, they will jump on these types of properties. As a result, these investors can purchase a property for more than the "flipper" since ther investment value of the property is totally different. The other factors that these investors will look at is also where the property is located. Obviously there are many cash flow properties in awful neighborhoods where there is little sign of potential redevelopment where another area the neighborhoods are seeing signs of revitalization and growth ! These investors will want the appreciation over time - they are patient and caluclating.
Break - Even
A mix of these type of investors is the investor who just looks to break even on his cash flow because he is holding the property for appreciation. I refer to these types of investors as the condo buyers in hotter and growing markets. They believe a city is on the rise and will look to invest in a growing area without having to do much rennovation and maintenance. If an investor buys a new construction condo or something that does not need any work, his expenses will be a little higher with the condo fee. If the rental income covers the mortgage payment and other expenses they are happy as they are holding this property for the next up-turn or for certain tax advantages. With each of these scenarios there are tax benefits to each such as a 1031 tax exchange. I would consult with your accountant or CPA due to the fact that the tax law is constantly changing.
Once you know what your goals are, you then know for the most part of what you are looking for and are now ready for STEP 2 - Selecting a Property !!! Step 2 will be out approximately one week from today !
Chris and Stephanie Somers