Buy Investment Property Without Seeing It Why Room Rentals Things To Keep In Mind While Buying A Home House Flipping What To Look For When Walking A Property
Why would you buy investment property without seeing it? It’s a numbers game. Whether or not you see the property before you make an offer isn’t nearly as important as making sure the numbers make sense.
A man in California used to just send out offers on a hundred MLS listings at a time, offering 25% less than the asking price on each one.Occasionally a few sellers would accept his offers. He never had to look at the homes beforehand. Including an “inspection and approval” clause in the offer meant he could always back out of the deal later when he saw the house. Meanwhile, he efficiently found the truly motivated sellers.
This true story demonstrates that with a good clause or two in the contract, you don’t have to worry about making an offer before you see a property. It’s true when you buy investment property or your next home. When it isn’t everything the seller says it is, you can reject the deal with little or no loss. So why wouldn’t you want to look at the property?
Buy Investment Property By Numbers
The main reason you might skip looking at a property before making an offer is time. This is certainly true if the property is far away. If you don’t get a price that makes sense, why spend your time traveling to look at real estate investments? A price and terms that make sense – this is what is important. Of course you’ll probably want to look at the actual property eventually, but looking at the numbers is how you invest.
Investors value income property according to current cash flow (or should if they want safe and viable investments), so start by verifying income. Get the actual income figures for the past 12 months. Always consider the potential income if rents are raised, vending machines are added, etc., but base your offer on the current income.
Verify all expenses with investment properties. If any expenses listed by the seller seem unusually low, they most likely are. Just substitute your own best guess in place of any suspicious numbers.
After you determine the net operating income, apply the appropriate capitalization rate to arrive at the value. If you’re not sure how to do this, get help. However, you really should understand the principle of how to figure a cap rate. This is a numbers game you’re playing.
Calculate loan payments (talk to your banker), and see how much cash flow you’ll have. Then you can figure your cash-on-cash return based on how much of your own money you put into the deal. Just divide the cash flow by your investment.
When the numbers work, you can safely make an offer. Inspections will tell you if there are problems that will affect the cash flow. You can always renegotiate if there are such problems (assuming you made your approval of all inspections a contingency of the offer). Of course, you can even go take a look now that you are truly ready to buy that investment property.
Room rentals? Why would you want to make your home into a boarding house? Maybe you shouldn’t. I enjoyed having people living in my house, and most of them became friends. On the other hand, you might not like that arrangement. I hated being a landlord when I owned rentals that were not my home. Each of us is different.
Consider Your Room Rental Options
You don’t necessarily have to live with the room-renters, so consider all the options available. You could do any of the following:
1. Rent rooms in your own home and share common space with the renters. This is what I did for several years when I was single, and it worked fine for me.
2. Partition your home so you can rent rooms without sharing common space.You’ll need at least two bathrooms, and separate entrances to make this work.
3. Add an efficiency apartment for yourself, so you can have privacy, perhaps still sharing a laundry room with the renters. This is what we did when I married. It also opened up one my previous bedroom, increasing the rental income enough to pay for the new apartment in less than a year.
4. Buy a house just to rent it out by the room. This can be an excellent way to get cash flow out of homes that might not otherwise be such good investments.
5. Sublet a room in the apartment you rent. If this is okay with the landlord, it can be a way to afford a nicer apartment, or to get past financial hard times.
6. Use room rentals as a way to afford a house payment. If you are having trouble buying a home because you can’t afford the payments, you can buy a home with extra rooms and rent them out.
Consider The Money In Renting Rooms
The amount you can charge for rent will vary greatly in different parts of the country. Here is what I charged renting rooms in a mobile home in a small town in northern Michigan (a few years ago):
Small Bedroom: $65 per week times 52 weeks equals $3380 per year.
Medium Bedroom : $75 per week times 52 weeks equals $3900 per year.
Large Bedroom : $85 per week times 52 weeks equals $4420 per year.
Potential Annual Income (I had a couple weeks vacancy now and then): $11,700 per year.
This was a home that I lived in, remember. I included all utilities in the rent, and I tracked my expenses closely. Including repairs to the heating system, the refrigerator and roof, as well as utilities, garbage collection, cable television, local phone service, property taxes and insurance, my costs the last year I had the house were $3,900 (I had already paid off the $253/month mortgage).
How do you figure profit when you live in the home? Renting rooms in my home probably added $300 or so to the annual costs. Heating was almost the same cost, as was garbage collection, taxes, insurance, cable television, and phone service. A little more wear and tear and a bit more electricity were the only real additional costs. In other words, almost all the extra income was profit. Or if you want to look at it another way, I lived for free and had $7800 income from the home I lived in.
Do you want to have thousands of dollars of extra income every year? What would you do with that money? Think about that, and you have the answer to why you should rent rooms.
Buying a home is really exciting. But before buying there are certain things you must look for and here are they to help you out.
Whenever you are looking to buy a house get a pre-approval document. A pre approval document is needed by the real estate agent to show that you are ready and serious about buying a house. It will add on to the advantages and will empower you to negotiate a better offer to buy the home of your dream.
What are the things you will require to get a pre approval? Just read on:
You should get a copy of you FICO score. Most of the people start looking for a home then applying for a home loan only to find out later that there is something wrong with their credit. Do not let this happen to you. So get a report before finding a home. A FICO report is a tally of your credit score aggregated from the three major reporting credit bureaus. Any negative information such as collections, late payments and bankruptcies can tarnish your score. However you can fix your credit score by paying off the collection accounts, pay your bills on time and paying down any credit cards to lower 40% the maximum limit. In a few months you can raise your FICO score by as much as 20 to 100 points. This means better loans term when applying for a loan. So do not forget to get your FICO score before buying a home.
There are costs in buying and selling a home. If you sell a house prematurely it may prove to be disadvantageous to you. The right alternative can be refinancing. So buy a house for a longer period at least two to three years.
You must aim for a house that you think can afford to buy making the monthly payments. Do not buy a house that is unnecessarily expensive. You should buy a house that is right for you. As house purchase can prove to be your biggest investment you make, hence you would prefer to get a good return in future.
You have to live in the house you are buying so buy it at a location that is convenient to you. When looking for right locations consider good future equity appreciation, safety, a good school district and a nearby freeway access.
Always compare the price of the houses you are going to buy with you neighborhood. Once you have found the house of your choice you must compare its prices with the other houses in that area the price should not differ more than 5 percent than the average cost of the houses in that area.
You must also get a house inspection done before making a deal. This inspection can help you find the damages that may need certain repairing by the seller.
It is always in your hand to crack the best possible deal for yourself. All you need to do is be cautious when making a choice.
1 Price – Before you even go to look at the property you need to make sure that the price is way below the market value of the real estate in that area otherwise you are wasting your time looking at properties that you cannot make any money on. So you need to make sure it is so far below the price of other house that you can fix it up, hold it, and pay fees and commission and still make a huge profit.
2. Foundation – I buy and sell real estate in Texas and foundation is a huge problem here, and it is the first thing I look at. If there is foundation damage you need to see how much this is going to cost to have fixed. Many times when I am looking at a property I can call my foundation guy and he will come out and give me a free quote on the spot. Foundation damage can drain a budget so until you are comfortable with you skills at judging the amount of foundation damage call a pro for a quote and then factor that in your budget. When looking on the outside and inside of the house you are looking for cracks above windows, along brick mortar, over doors, and in corners, and many times you can feel the foundation sinking in certain areas of the house. Be sure to walk to the corners on the rooms and you will be able to tell if the piers have sank.
3. Roof – Next I check the roof by counting the layers of shingles. Normally if there is over 2 layers of shingles you are going to need to replace the roof. Also, as you are walking through the inside of the house look up at the ceiling and look for water spots. This is also a huge indicator that you are going to need to replace a roof. Your foundation and roof are normally you 2 biggest expenses.
4. Walls – Look for holes or damaged sheet rock that is going to need to be replaced. Drywall is cheap and not a big deal, but does cause a lot of buyers to run away from the property. I love houses with holes kicked in all the walls. Holes = Money
5. Electrical – Look at condition of breaker box. If you are going to add something like a A/C unit you might have to upgrade the electrical, so you need to keep that in mind. Next if the power is on to the house you can check the lights and buy a cheap power test that you can plug in a wall to tell you if it has power, and you can get an idea if the electrical has issues in the house.
6. A/C and Heat – Check to see the age and condition of the air conditioning unit in the potential flip so that you can see if you might have to replace them and leave room in the budget if you think you might have to replace the unit.
7. After that cabinets – Look to see if you can use the old ones or if you are going to have to replace them all.
8. Counter Tops
9. Plumbing – Make sure the toilets will flush and water will run. The water heater is normally off so you can’t test it, but you can look to see how old it is, and that will give you a ideal if you are going to have to replace it. See how many faucets, toilets, shower heads, and other plumbing fixtures you might need and factor them in the budget. I normally replace almost all the plumbing fixtures to give the house the new look.
10. Flooring – See how much of the flooring is going to be fixed or replaced. I always if possible refinish my hardwood floors, and put down ceramic tile. If there is no hard wood I will estimate the cost for carpet.
11. Paint – Don’t for get to price paint inside and out
12. Appliances – I normally replace all the appliances, so you need to factor that in as well..
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