My cousin, Jason, and I have been best buds since we were kids. Always looking out for each other, we were one another’s partner-in-crime, so to speak, often getting into—and back out of— a jam. Mind you, we weren’t bad kids. We were just good at wearing our parents’ patience pretty thin. And, it’s because we’ve continued to look out for each other as adults that, these days, we’re even better at making our parents proud.
Take our chat last week as an example. Jason, who went on to become a high-profile CPA while I ventured off to become a successful real estate investor, called me up to talk about buying residential investment property and turning it into a new career. I was surprised to hear that he was thinking about leaving his lucrative desk job but eager to help him make the transition as easy as possible nonetheless. After all, that’s what family, and best friends, are for.
What to Consider Before Buying Residential Investment Property
Anytime someone tells me that they want to be a real estate investor, I can’t help but internally evaluate whether or not they’ve got what it takes. Starting a new career after spending decades in an old one can be dicey. There are risks to residential property investment that you never have to consider when migrating from one desk job to another, like a lack of regular, predictable income. I don’t have any doubts about Jason, however. He works to absorb new information like a sponge, then he works harder to put what he’s learned into action. If that sounds like you, I bet you’ll do alright too.
Plus, there are ways to temper the risks of buying, renovating, and selling homes so that you don’t get into trouble and, instead, get into a good deal. Here’s what you need to consider before you buy that first investment property—and, quite honestly, every property thereafter.
- How much to buy. If the cost of buying an investment property is too high, the likelihood of seeing any returns later will be too low. So, weigh the purchase price carefully. But, it’s not just the cost of the property itself that you’ll need to consider. Vacating any tenants must be factored into your calculations, as well as the cost to remediate back taxes, liens, or other encumbrances that may exist. Each of these items has an impact on your returns and should be accounted for before you make an offer.
- How much to rehab. The extent of the rehab and the cost to get it done right should also be considered before putting in an offer on a property. There’s a big difference in sprucing up a minor fixer and a major money pit that could cost you in both time and money if you don’t know what you’re getting into. To help determine how much needs to be done, and how much you’ll have to spend, always perform a home inspection. If the cost to renovate a home pushes your numbers past what you can realistically sell it for later, pull back—and find another deal.
- How much to hold. Since it costs to hold a property while you’re performing renovations as well as when you’re marketing it later to sell, think critically about how these expenses could add up. The mortgage or hard money loan payments will need to be made and the utilities will have to be paid too. You’ll also be responsible for paying local property taxes and protecting your investment property with the right insurance coverage. If taxes are high where you invest, like in New Jersey, or the rehab is delayed because of a long, cold winter, like what we have in Illinois, the cost to hold a property can be substantial. So, keep these numbers—and your timeline—in mind when determining if a deal is a deal right now.
- How much to sell. If you don’t know how much you can sell your investment property for after the rehab, then closing with confidence could end up the least of your worries. Overestimating the After Repair Value (ARV) puts you at risk of losing potential returns, but so does underestimating it. Of course, it’s the former scenario that could cause you to also lose your hat—and everything else—if you’re forced to sell the house for less than what you paid. But, neither situation is good for business—or your bottom line. So, don’t sell yourself short by neglecting to consider what other homes of comparable size, style, and condition in the area have recently sold for.
- How much is hidden. After all is said and done, expect surprise expenses. Even when you’ve calculated all of the known potential costs of buying an investment property, things crop up. And, if you’re not prepared when mold is discovered behind the wall during your property’s kitchen renovation, your bank account may not be ready to handle it either. Since there’s no way to know what surprises may be lying in wait, assume that there are a few—and plan for these hidden costs when evaluating and budgeting the deal.
The long and short of it is that, to succeed at investing, you’ve got to be able to correctly and quickly analyze real estate deals. The numbers matter, but so does your ability to crunch them fast—especially if you’re trying to build your investment business in a competitive city, like New York or Austin. That’s why it’s critical to have the best valuation tool at your disposal so that you don’t risk seeing your potential returns, or a potentially great deal, disappear.
Consider Joining a Team With Access to Some of the Best Tools
I came to investing with a love of numbers, something Jason and I shared both as kids and as adults. But, evaluating the costs of buying residential investment property by hand or on a spreadsheet was often time-consuming and, thanks to the occasional user-error, not always accurate. Unfortunately, a lot of the online tools I found were no better—particularly when it came to evaluating rehab costs and determining the ARV. I needed a tool that could help me quickly assess all the potential expenses associated with a property, ideally on site, and that considered local labor and material costs to ensure I got my numbers right.
When I joined the HomeVestors® team as an independently owned and operated franchisee, that’s exactly what I got—and more. HomeVestors’ proprietary valuation tool, ValueChek®, analyzes more than 80 repairs, all of which are adjusted to reflect your local market, in addition to estimating a property’s ARV. So, I know how much to purchase a home for, as well as how much of an ROI I could potentially realize when I sell. What’s more, should I still have any questions or concerns about a deal, I’ve got a team of other local and regional HomeVestors® franchisees that I can call on for advice. Even better, I can access both of these benefits right from my iPad.
Want to buy residential investment property? Consider joining the team that’ll treat you like family. Contact HomeVestors today to get access to some of the best tools and advice around.
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