We are extremely conservative investors. When we buy, the goal is for the property to be a deal the day we close, not the promise of a deal in the future.
Certainly, real estate is worth more over the long term because the population continues to increase and there is no more land being made. However, there are many years where property values stagnate or even decrease and you can be looking years into the future for property value increase. Bottom line, don’t count on appreciation for profit, count appreciation over time (when you get it) as a bonus.
So, before you enter a deal, make sure the deal is profitable immediately. How?
(1) If you plan to keep the property as a rental, you must buy low enough that there is equity the day you purchase. Additionally, your rental amount must be at minimum $200 more than your monthly expenses (PITI – principle, interest, taxes and insurance). That is the fastest and easiest way to make back your costs for purchase as well as maintenance over time.
(2) If you plan to sell (flip) the property, buy it enough below market value that you can spend the money necessary to fix it up, market it at a discount significant enough to get it sold quickly, and still have enough remaining to make a profit. Know going in that your rehab costs will be more than you budget, buyers will want more repairs than you plan for, closing costs will be higher than you expect, and carrying costs will eat into profits. Beyond that, don’t forget that Uncle Sam will want a cut of your profit. Considering all these things before you purchase helps you negotiate a better purchase price.
As an example of hope for the future, we know an investor who got several properties under contract for a great price. He did not have enough cash to renovate and get them to market on his own, so he sought out investors who would fund the renovations at the appropriate time. He found a private lender who agreed. However, when the time came to collect the funds, this lender had already loaned out his funds and panic erupted.
Why did the lender move on to others? Who knows and it doesn’t really matter. What does matter is that this investor started into a project with a “hope” for future funding, rather than having them definitely secured. How do you know when you have the funds you need? When contracts are signed and, to be safe, you’re working with a more traditional more experience and well funded lender. Before that, you have a promise – you have hope.
Never start a project without profit in the deal and necessary funding – secured. Anything can happen with a promise (and does). No matter how much you want the deal to work out, hope is not a strategy.
And any deal has to work the day you buy or it isn’t a deal. Remember, it’s easy to buy – it’s much harder to make a profit. A deal that may work out in the future isn’t a deal, it’s a hope and “Hope is Not a Strategy!”
What do you do to make sure your deals will work out or make profit from the day you purchase?
