Considering an Investment Property? Do the Math First!

Considering an Investment Property?  Do the Math First!

Today, many buyers are looking for that “great deal.” We’ve seen deals in various price ranges. 

Investors have gotten back in the market. Some are looking for houses to use as rentals, while others that are a bit braver are attempting their hand at flipping, for a profit.

Investors typically look at properties that need work, so they can build some sweat equity.  Some will buy a house that needs a new roof, or a new A/C, one that needs a new kitchen, new baths or maybe just new flooring and a coat of paint.  It depends on the amount of time, money and work each is willing to invest.  However, they all have one common thread – they are ALL looking for a great deal.  

Investors are in the business of trying to make money. Remember, an investor makes his money when he buys. An investor may want to be careful if buying on speculation -with the thought of all the money he will make in the future. Right now, no one is certain what the future holds. However, it is important to consider a property that will have positive cash flow each month. 

Some investors are pros in their trade.  They can rehab a house in under a month.  They understand the time value of money – in and out quickly.

Others that are just getting their feet wet, should tread lightly.

 In buying an investment property there are several considerations:

-Will you be doing the work yourself?

-How long will it take to complete the job?

-How much will it cost in materials?

-Will you be paying yourself to do the work? Or, could you be working somewhere else and making more money?

-How much are your closing costs to purchase the house?

How much will holding costs be?  If it takes 9 months to do the job, how much does that add up to in mortgage payments? What about monthly water bills, electric bills, gas bills?  And, homeowners association fees?

If the house is going to be resold, how much will the closing costs be to sell? 

-How long will the property be on the market before it sells? Add that and the monthly holding costs.

Most importantly, be sure the house being considered has positive cash flow

In my opinion, sometimes it’s better to pay a little bit more for a property, than spending months fixing it,  while it sits empty.  Buy one that doesn’t need a major overhaul, but perhaps just some elbow grease and a coat of paint.  Get the work finished in a couple of weeks, and get a tenant in as soon as possible, so there’s money coming in. For some people, it pays to save the headache of trying to do the work themselves. They’ll save in fix up expenses and many extra months of holding costs.

Or, consider this; why not buy a house with a tenant already in place? Collect rent from day one. The tenant will be paying the mortgage, taxes and insurance.  If the tenant is in place, money won’t always need to be put in immediately for fix up. When negotiating the contract, be sure to have written in the contract that  the tenant’s security deposit is to be transferred to the buyer, at closing and last month’s rent (if there is any). Ask for a closing on the 3rd of the month (provided rent is due on the first), that way the new owner has to credit the buyer with that month’s rent at closing. I’ve purchased a couple of properties with tenants in place, and it worked out nicely.

Most importantly, when considering an investment property, work the numbers on paper first.  Investors should weigh all of the options.  Which is the best type of house to buy?  What are the plans for the future? If the numbers don’t work, don’t even go to look at the property.  It’s not about buying the prettiest house on the street. It’s about buying the house that brings the most money on the initial investment.  How much cash flow will the house bring each month?  The smallest houses bring the most money per square foot in rent.  Taxes and insurance will be lower on a smaller house, also.

We hear about sweat equity and it adding to the value of a property. An investor should be careful that the house has the right things wrong with it.  It may make more sense to think smarter, instead of working harder For a new investor, if the house becomes a nightmare and it burns a hole in his pocket, I promise, it will be the first and the last house that investor ever buys. Real estate investing is not for everyone!

Remember, every investor is out looking for that GREAT deal.  Don’t sit around waiting for that GREAT deal, and let the good deals pass you buy!

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Melbourne FL Real Estate, Sandy Shores, Realtor

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Sandy Shores Melbourne FL Realtor

Sandy Shores, Melbourne FL REALTOR

Specializing in Residential, Investment and Relocation Real Estate.

Melbourne Real Estate / Palm Bay Real Estate

and the Surrounding Areas

I buy, sell, rent, own and manage Real Estate.

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