The scene is all too familiar. A real estate investor is presented with a dilapidated property as a possible investment option. The investor spends too much time weighing his options that another investor jumps in and makes the purchase. The real estate investor could have made a more decisive move on the property if he had known how much he can offer based on his acceptable margin. Is there a way to prevent this from happening?
There is a simple and accurate way by which you can determine your potential profit when buying a rental property or a major repair. Unfortunately, there are quite a few ways that you can analyze the feasibility of a deal, and the selection can become complicated or confusing. You can purchase business solutions that can calculate the internal rate of return so you can determine how long it will take to recoup your investment in a property. You may also consider using spreadsheets and doing the calculation yourself.
Regardless of which assessment method you’re using, you need to remember a basic business principle: garbage in, garbage out. Regardless of the reliability and level of accuracy of your trading tool, you will end up making bad investment decisions if they are based on faulty assumptions and data. If you haven’t set your margins, or if you’re unsure about your closing cost and cost to repair, you’re probably wrong when making your investment decisions.
In fact, you can decide not to use these fancy trading tools and still have a good trading idea. Sometimes all you have to do is ask the seller or real estate agent the right questions before making a decision.
Here are some important “rules of engagement” to keep in mind when evaluating your investment options. The first rule is quite simple: if you find yourself needing to perform complicated calculations before you can make a decision, the deal is not likely to produce good results. How is this so? If you find it difficult to establish your potential margin after considering your offer and the cost of the repair project and other related costs, then you are probably taking more risk than you should if you decide to go with this particular deal.
The following rule is also quite simple. If you can’t make a decision without asking for someone’s advice or insight, then you might as well pass this one up and consider other investment options. If you can’t make a decision with confidence after evaluating the information and reports on the property, then the best thing to do is to move on and seek other investment prospects.
Once you can cover the rules of engagement, your next concern will be how you can put them into practice. You can adopt these rules of engagement to obtain the essential information you need to make an informed decision.
Here is the list of basic information that you have to establish before finally making the purchase:
o Post-repair/rehabilitation value of the property
or cost of repair
o Closing cost
On the other hand, if you are looking for a rental property, you need to be able to determine the potential income from rental payments.
The next logical question you will ask yourself will be the acceptable price offer. If you are considering a major repair, then your proposal should not exceed 70% of the post-repair value of the property. This will ensure that you still have at least a potential 30% margin after adding repair cost and closing cost to your price offer.
