Buying an investment property can be a very intimidating experience for those that are unfamiliar with the process. It is quite easy to get confused with everything that can be thrown at you, and at the same time might I add. To that point, there is often a tendency to overthink certain deals. However, I can assure you that taking a step back and focusing on what really matters can pay huge dividends. At the end of the day, there are really only four items that you need to look at. Almost everything you need to know will fall under one of the following categories:
1. Location: Location, location location. We hear it all the time when discussing real estate. Without a good location, nothing else matters. All good investment deals start with an understanding of the market the property is located in. Numbers will tell you a lot about your deal, but nothing speaks louder than the location. A property in a prime location will give you options, whether you want to rent or rehab. Conversely, a property in a poor market will be tough to move. The best way to learn about a market is by getting in your car and driving it. You can read all the facts and figures on a website, but they may not tell you the whole story. You need to see how the property looks during the day, and what kind of activity there is at night. There is plenty that can change in the matter of just a few miles. What you may think you know about a location based on a previous deal could be all wrong. Never base your opinion solely on the listing sheet or what you may find online. The age old adage about the importance of location still rings true today and applies to any market.
2. Price: Instead of looking at the listing price and determining if it works for you, come up with your own number. There are times when you will come in above asking price just to secure a deal. In most cases, you will offer well below based on your own due diligence. To come up with a price, you should first evaluate what is on the market and how they stack up to your subject property. One of the biggest mistakes that is made is assigning value to areas that don’t really add value. The most important comparable items are bedrooms, bathrooms and square footage. You should also recognize the style of house it is. Everything else won’t move the needle too much one way or another. Decks, pools and even garages are nice to have, but they don’t make an appreciable difference to the value. Like anything else you buy, you are always looking for the best possible deal. Most listings have multiple offers, so it is important to think about the big picture. You never want to lose a deal you see value in over a few thousand dollars
3. Condition: Condition and expenses often go hand in hand. There are many investors who overestimate the importance of the first impression they get from a property. Savvy investors know that cosmetic items are an easy and relatively inexpensive fix. You should focus on items that need to be fully replaced instead of just repaired. You should also look at what are referred to as the “bones” of a property. The foundation, roof, windows and mechanical items are where your budget will take a hit. Replacing an old carpet with hardwood floors will cost you, but not as much as a new roof. After you evaluate the condition, you need to place a price on the cost to repair. Using roundabout numbers or estimates is not good enough. You need real figures to base your offer on. Lean on your contractor to help walk you through this process if you aren’t comfortable. This area will go a long way in determining the strength of your deal.
4. After Repair Value (A.R.V.): Sometimes starting at the back end of the process is a good way to look at it. Before you can make an offer, you need to know what the after repair value is. This will have an impact on everything you do in the deal. This is another area where you should lean on your team for help. Your real estate agent should be able to provide you with current listings or recent sales in your area. Break these down to see how well they compare to your property. If you have the same bedroom and bathroom count, you should have an idea of your starting point. Value is given to the condition of the property and any improvements that are made. Don’t just look at the highest comparables and think your property will match or exceed them. It is best to either use an average or take the lowest one. You should also factor in that the market may change by the time your work is done. If you don’t know your end goal, it is difficult to know where to make an offer.
