Where others see a problem the best real estate investors create an opportunity. But, sometimes even experienced real estate investors can miss out on an opportunity if they don't look at it the right way.
I know, because I almost missed out on a deal that's made us $100,000 and counting!
I'm talking about a little house that looked more like a tool shed than a dwelling. Just a 600 square foot wood structure sitting on a concrete slab with no basement and no garage - it was darn near the last thing I wanted to own.
It looked like a nightmare to me. I had visions of constant repairs and never-ending tenant troubles. I really couldn't imagine anyone living there and figured it was a waste of time to even think about buying it.
But my husband told me to do a reality check - because there were a lot of reasons to like the deal:
That area, and specifically within a block of this property, was being totally redeveloped with mixed use properties.The lot was large even though the house is not.We could pick up the property for no money.And, it was one of the cheapest properties we'd seen listed in the City for years and years,The current rent would cover all carrying costs until we figured out what to do with it.
Five years later, that property - which essentially is a large chunk of land in an emerging area - has more than doubled in value and the rent has covered all the costs. My husband and his Dad have only spent one afternoon there fixing the porch but beyond that we've yet to have to put a single dime of ours into it.
It's just as easy to get excited by a property that isn't really a good opportunity as it is to miss out on the ones that are. So next time you are about to walk away from a deal or you think you've found a great one run through these four items in your mind before you make your final decision.
Will it rent easily?
I couldn't imagine myself living in that little shack but I was not the target market for that rental.
The same tenant has been there since the day we bought it. He loves the large yard. He doesn't mind the exterior appearance because he finds it cozy inside and the rent is cheap for the privacy and space he enjoys.
If there will be strong demand for the property as a rental, it doesn't matter whether or not you would live there. (Just make sure the target market you're after is one you're prepared to deal with because some tenants require more time and energy than others)
Are emotions driving your decision?
Emotions weren't involved in this particular purchase, but it's something to be aware of in every real estate deal. If, at any point in the negotiations, you feel emotionally that it's a deal you HAVE to have or a deal that you won't do because of some emotional reason (I'm afraid of losing money, I'm afraid of missing out) you need to take a step back, take a breath and review everything! When your emotions are involved, you can't make rational decisions.
What do the numbers say?
My Dad told me about a conversation he had with his accountant about one of his properties. He asked the accountant what the numbers said about the profitability of the building. The accountant said with a smile, "What do you want them to say?"
In other words - was this for a bank, a buyer or the tax man? The answer can be different depending on whom you want to appeal to because there are plenty of ways to make a property look like a good deal. It's up to you, as a buyer, to make sure the numbers really say what the seller says they say.
In this deal, the numbers sold me. The rent covered all the expenses and left a small cushion for surprises. And, the tenant we had in place was signed on for a year. We doubled checked all the utility bills and felt confident the numbers would be as we projected, but even if they were off a little bit we weren't investing any money into the deal to get into it, so we were able to set aside a little cushion of case just in case we needed it.
Before you purchase a rental property review each and every lease in place, and then double check the rent with the tenants, get copies of the bills direct from the vendors and check market rental rates for the area to make sure the current tenants aren't overpaying.
Are You Judging the Book by Its Cover?
Many opportunities are missed because a property makes a negative first impression. The best deals are often those that look rough but can be repaired and restored for little cost and effort. Granted, our little shack needs to be completely rebuilt to maximize its potential - but had my husband allowed me to judge it strictly on its looks, I would have missed a deal that has (so far) grown our net worth by $100,000.
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