Ask four investors how to spot a good investment property you’ll probably get four different answers. And if these are actual, boots-on-the-ground experienced investors there’s a good chance all four answers are correct.
There’s more than one way to be an investor and deals are measured differently across the multiple niches in REI. However, any investor worth their salt has the ability to sniff out a good deal in a given market and investment strategy. Overpaying for properties – no matter the market or niche – is NOT how you’re going to find success as an investor.
What is a Good Value?
When you bought your primary residence, chances are you considered a few factors: location from work, church, quality of schools, as well as the appeal of the neighborhood, along with nearby amenities like shopping and parks. You may have also considered the appreciation and tax benefits of home ownership – but most see those as added benefits. Of course, it’s nice to buy a home and have it appraise for tens of thousands more next year, but if you plan on being in the home for years, that’s not really at the forefront of your decision.
As an investor, you must be cognizant of location, and the potential for appreciation, but at the end of the day you really need to focus on the numbers as they stand today. This is a business first and foremost and overpaying for a great home in a nice part of town is not a good deal if you’re trying to flip the property in a few days, weeks, or months.
Value is derived from finding investment properties that can be had at big discounts in relation to their neighboring properties. When you consistently find and place “the worst properties on good streets” under contract to either wholesale, fix and flip, or hold as rentals, you WILL find success in the long term.
Respect the Numbers: The 70% Rule
If you’re just getting into real estate you may be asking yourself how to analyze a conventional deal. Now, every deal is a bit different, however, for investors, the 70% rule is pretty much accepted as the standard basis for property analysis for Fix & Flip deals.
(ARV* – UPFIT**) x 70% = Maximum Purchase Price
*ARV =After Repaired Value (What the property should appraise for after rehab)
**UPFIT = Repair costs to rehab the property; Holding Costs like loan fees, taxes, insurance, and utilities; Acquisition and Sale Costs like closing costs and commissions.
In other words… If you have a distressed property that’s worth $100,000 and the Upfit will cost $15,000, the most you can possibly pay for this property is $59,500. Now, of course, you want to get it cheaper if possible, but using the 70% rule establishes your ceiling.
($100,000 – $15,000) x 70% = $59,500
Keep in mind that if you’re a wholesaler, you also need to subtract your assignment fee from the maximum purchase price. Otherwise, there won’t be any room in the deal for your profits if you contract it at the maximum buy price.
What About Buy and Hold Investors
If you’re building your rental portfolio or owner finance portfolio, you can acquire deals and rehab them yourself, or you can purchase “turnkey” properties at close to market value and rent them out. How you choose to build your portfolio is a matter of personal preference and risk tolerance. Some investors can’t fathom doing a rehab and would rather buy properties that are rent-ready.
Also, there are investors who are comfortable renting properties that don’t positively cash flow monthly or even lose a bit every month if they’re banking on appreciation – but this is highly speculative and goes against the golden rule of investing, “Don’t lose Money.” Whereas others are busy trying to stuff their portfolios with high cash-flowing properties, not worrying about appreciation. However, for the average buy and hold investor there’s the 1% rule to help serve as a very basic starting point for property analysis. A more thorough analysis uses Net Operating Income (NOI).
(Sales Price + Repairs) x 1% = Rental Rate
So, if you find a property that you can get under contract for $85,000 and it will cost $15,000 to rehab. The minimum amount you should be able to rent that property for should be $1000 per month.
($85,000 + $15,000) x 1% = $1000 per month
Now, this isn’t a hard and fast rule, and many investors who ply their trade in less than desirable markets will aim for a 2% multiplier. Investing in “War Zones” can be expensive business and it pays to get as much as you can from your renters to offset the costs of owning in less-than-desirable areas.
Buy and hold investment properties are longer term relationships than typical wholesale or fix and flip deals. You have to deal with ongoing repairs, yearly tax implications, insurance, theft, and managing renters. However, the our community has tons of resources available to help make sense of it all.
Need FUNDS to Fix and Flip or Buy & Hold Good Investment Property Deals?
Oakmont Investments has you covered! You can now submit your deals to verified hard money and private lenders who are looking to finance investors just like yourself. You’ve done all of the work to find a deal, now get the deal closed quickly using a lender who’s both COMPETING for and UNDERSTANDS your business at Oakmont Investments
Where Are the Good Investment Property Deals?
Distressed properties that make for good investments are everywhere. Most people who are under financial distress or just inherited an unwanted property don’t stick a sign in the front yard advertising their situation. Profitable investors understand the importance of having a consistent flow of property leads to analyze and make offers on. Buying properties at a deep discount is simply a matter of effort and repetition.
More Offers Made = More Opportunities to Buy
If you aren’t making offers so far below market value that don’t make you at least a bit uncomfortable, you aren’t truly serious about doing good deals. You have to find homes with equity and be able to close on them quickly…
Being able to spot a good deal and get it under contract faster than the next guy is a MAJOR component of your success in REI. Oaamont is here to help you close these deals faster than your competition. Respect the numbers and they’ll take care of you. Start investing on whims and hunches and watch how fast you lose your shirt…