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Dp2's Answers (15)
Dp2 answered:
Let's assume that the average rent in Milpitas is $1500.
Assuming that you'll be able to rent whatever you decide to purchase at least at $1500/month, then the max you'll be able to offer (in order to cash-flow positively) is: 12(1500)(.65)/.09 = $130,000.
Assuming that you'll be able to rent whatever you decide to purchase at least at $1500/month, then the max you'll be able to offer (in order to cash-flow positively) is: 12(1500)(.65)/.09 = $130,000.
Dp2 answered:
George Santayana stated, “Those who do not learn from history are doomed to repeat it.”
Although I agree in part with Chgo Agent that there are agents who are doing some of their clients a potential disservice by preaching the NIAGTTB message, I disagree with the recommendation that all investors should wait for the market to improve. Warren Buffet is a serious investor who knows what he's doing; he practices and teaches the mantra: "Be fearful when others are greedy and greedy when others are fearful."
Any time can be a good time to buy--provided the buyer knows what s/he is doing. In the height of the Depression, the unemployment rate reached about 25%--but some people still had jobs and were making money. For example, Fred Trump (Donald Trump's father) was one of those people; he established his business and made money during the Depression.
Please keep in mind that all investors--or other buyers for that matter--don't buy for the same reasons. There's no one-size-fits-all strategy for buying, so there shouldn't be one for marketing.
Any property can be a great investment if acquired at the right price; similarly, any property can be a bad investment if acquired at the wrong price. Smart investors purchase their properties at wholesale prices (20%-30% off of the market value). Investors aren't the only ones who purchase products and services from their suppliers at wholesale prices, add value, and resale the end products at retail prices (for a profit). Buy low, and sell high . . . and . . . profit on the buy, and realize it on the sale . . . these are two important mantras in business. Most manufacturers, physicians, educators, farmers, car-dealer owners, etc purchase at least a portion of their supplies at wholesale prices; and they sell their products/services at retail prices too. Also, that "deep discount" is NOT the profit from the transaction; instead, it's the margin (sales price - costs). Of course, the profit is included in the margin. Keep in mind most of the margin goes towards fees: legal, tax, document recording, banking, environment tests, pest control, security, theft, weather-related expenses (flooding, down power lines, burst pipes, etc), appraisal, inspection, ALTA survey, marketing/sales, staging, title, insurance, cost of money (points, interest, draws, deposits, etc), utilities, licenses/permits, use changes, on-site property and project management, clean-up, trash removal (ie dumpster), accounting, and repairs (materials and labor).
Also, please keep in mind that short-term investors (wholesalers, flippers, etc) and long-term investors evaluate each potential opportunity using different approaches. The prior use comps and other market data to determine the value of a property; whereas the latter use an income analysis (which is definitely used more extensively in commercial real-estate). The latter care less about the current market value of a property, and more about its cash-flow. So, whether or not the prices continue to fall, as long as a property has a positive cash-flow then it could be a good/great deal for someone.
One more thing . . . earlier someone mentioned that the days of 100% financing are gone. That's not entirely true. Although most conventional, residential lenders don't do 100% financing anymore, there are other options--especially for investors: commercial financing (for certain deals), and creative financing.
Although I agree in part with Chgo Agent that there are agents who are doing some of their clients a potential disservice by preaching the NIAGTTB message, I disagree with the recommendation that all investors should wait for the market to improve. Warren Buffet is a serious investor who knows what he's doing; he practices and teaches the mantra: "Be fearful when others are greedy and greedy when others are fearful."
Any time can be a good time to buy--provided the buyer knows what s/he is doing. In the height of the Depression, the unemployment rate reached about 25%--but some people still had jobs and were making money. For example, Fred Trump (Donald Trump's father) was one of those people; he established his business and made money during the Depression.
Please keep in mind that all investors--or other buyers for that matter--don't buy for the same reasons. There's no one-size-fits-all strategy for buying, so there shouldn't be one for marketing.
Any property can be a great investment if acquired at the right price; similarly, any property can be a bad investment if acquired at the wrong price. Smart investors purchase their properties at wholesale prices (20%-30% off of the market value). Investors aren't the only ones who purchase products and services from their suppliers at wholesale prices, add value, and resale the end products at retail prices (for a profit). Buy low, and sell high . . . and . . . profit on the buy, and realize it on the sale . . . these are two important mantras in business. Most manufacturers, physicians, educators, farmers, car-dealer owners, etc purchase at least a portion of their supplies at wholesale prices; and they sell their products/services at retail prices too. Also, that "deep discount" is NOT the profit from the transaction; instead, it's the margin (sales price - costs). Of course, the profit is included in the margin. Keep in mind most of the margin goes towards fees: legal, tax, document recording, banking, environment tests, pest control, security, theft, weather-related expenses (flooding, down power lines, burst pipes, etc), appraisal, inspection, ALTA survey, marketing/sales, staging, title, insurance, cost of money (points, interest, draws, deposits, etc), utilities, licenses/permits, use changes, on-site property and project management, clean-up, trash removal (ie dumpster), accounting, and repairs (materials and labor).
Also, please keep in mind that short-term investors (wholesalers, flippers, etc) and long-term investors evaluate each potential opportunity using different approaches. The prior use comps and other market data to determine the value of a property; whereas the latter use an income analysis (which is definitely used more extensively in commercial real-estate). The latter care less about the current market value of a property, and more about its cash-flow. So, whether or not the prices continue to fall, as long as a property has a positive cash-flow then it could be a good/great deal for someone.
One more thing . . . earlier someone mentioned that the days of 100% financing are gone. That's not entirely true. Although most conventional, residential lenders don't do 100% financing anymore, there are other options--especially for investors: commercial financing (for certain deals), and creative financing.
Dp2 answered:
Don't wait until the bank forecloses on you.
You have several options: call your bank and ask to renegotiate the terms of your loan (ask them to lower your interest rate, to increase length of the amortization period, etc), call your bank and ask to negotiate a short-sale (and that you'll transfer the property deed in lieu), sell the property as is (most likely to an investor), rent the house (and use that rent to service the debt), sell that property using a lease-option.
You have several options: call your bank and ask to renegotiate the terms of your loan (ask them to lower your interest rate, to increase length of the amortization period, etc), call your bank and ask to negotiate a short-sale (and that you'll transfer the property deed in lieu), sell the property as is (most likely to an investor), rent the house (and use that rent to service the debt), sell that property using a lease-option.
Dp2 answered:
All markets differ; strategies that might work in one area, might fail in another.
Now is probably not the time to flip in Philly; however, it is a good time to flip in Atlanta, Dallas, and some parts of metro DC. You can verify this by checking out various REI clubs and/or forums, FSBO websites, and Craig's List in those markets. You can also verify this by contacting other investors and several realtors in those areas who specialize in working with investors.
Now is definitely not the time to flip in most parts of the Midwest; yet, it is a great time build up a portfolio of properties there as stated earlier. For example, it is a good time to build your portfolio in areas like Kansas City, Indianapolis, and Columbus.
Atlanta and Dallas are kind of odd in that they're also good markets to buy and hold properties.
Caveat emptor . . . you really need to check out the market data for a particular area, and you need to analyze the numbers for each deal. Be realistic. Don't guess. And don't be afraid to ask questions; most realtors and investors are glad to lend a helping hand. Besides, you never know . . . you might end up partnering with them on one or more deals.
Now is probably not the time to flip in Philly; however, it is a good time to flip in Atlanta, Dallas, and some parts of metro DC. You can verify this by checking out various REI clubs and/or forums, FSBO websites, and Craig's List in those markets. You can also verify this by contacting other investors and several realtors in those areas who specialize in working with investors.
Now is definitely not the time to flip in most parts of the Midwest; yet, it is a great time build up a portfolio of properties there as stated earlier. For example, it is a good time to build your portfolio in areas like Kansas City, Indianapolis, and Columbus.
Atlanta and Dallas are kind of odd in that they're also good markets to buy and hold properties.
Caveat emptor . . . you really need to check out the market data for a particular area, and you need to analyze the numbers for each deal. Be realistic. Don't guess. And don't be afraid to ask questions; most realtors and investors are glad to lend a helping hand. Besides, you never know . . . you might end up partnering with them on one or more deals.
The answer depends upon your exit strategy (ie what you intend to do with that property).
Now is a great time to purchase investment real-estate to flip or rent. Any property can be be a good or bad investment at any price. I know that sounds counterintuitive, and I'll elaborate. Let's say you acquire a house for free. Sounds like a a great deal so far, right? What if that property requires $60K in rehab costs, will take 3 months to do the work, and will take 3-6 months to sell? You'll need to make sure you have access to enough capitol to rehab, hold, and market that property until it sells. What if your holding and marketing costs total $20K? Basically, you'd earn money if you could sell that property for more than $80K, and you'd lose money otherwise otherwise.
Technically, although you'd break even (on paper) if you were to sell the property for $80K, you'd still lose money--because you worked for free.
Also, consider the time value of money. Would you prefer to A) wait another 3 months to save another $15K, or B) purchase that property now and earn $500-$1000 per month (after debt service and pre-tax)? Personally, I'd prefer to get that house now, and have that extra $1.5K-$3K in 3 months. Afterwards, I could take a third of that income, and gamble it away in the stock market. Just kidding, . . . but I think you see my point.
Yet, there's nothing wrong with waiting if you feel you're not ready to make a purchase right now. Take your time, and do it right.
Now is a great time to purchase investment real-estate to flip or rent. Any property can be be a good or bad investment at any price. I know that sounds counterintuitive, and I'll elaborate. Let's say you acquire a house for free. Sounds like a a great deal so far, right? What if that property requires $60K in rehab costs, will take 3 months to do the work, and will take 3-6 months to sell? You'll need to make sure you have access to enough capitol to rehab, hold, and market that property until it sells. What if your holding and marketing costs total $20K? Basically, you'd earn money if you could sell that property for more than $80K, and you'd lose money otherwise otherwise.
Technically, although you'd break even (on paper) if you were to sell the property for $80K, you'd still lose money--because you worked for free.
Also, consider the time value of money. Would you prefer to A) wait another 3 months to save another $15K, or B) purchase that property now and earn $500-$1000 per month (after debt service and pre-tax)? Personally, I'd prefer to get that house now, and have that extra $1.5K-$3K in 3 months. Afterwards, I could take a third of that income, and gamble it away in the stock market. Just kidding, . . . but I think you see my point.
Yet, there's nothing wrong with waiting if you feel you're not ready to make a purchase right now. Take your time, and do it right.
Dp2 answered:
Also, make sure the cap rate is greater than or equal to the interest rate for the financing; the greater the spread, the better off you'll be. This is called positive leverage.
On the other hand, if the cap rate is less than the interest rate, then you'll lose money--no matter how high the cap rate is. This is called negative leverage. Negative leverage isn't necessarily a bad thing--especially if you intend to invest long-term. As your equity continues to build up (via your mortgage payments and appreciation), that negative leverage will eventually transform into positive leverage.
Nevertheless, IMHO it's always better purchase investment property using positive leverage.
On the other hand, if the cap rate is less than the interest rate, then you'll lose money--no matter how high the cap rate is. This is called negative leverage. Negative leverage isn't necessarily a bad thing--especially if you intend to invest long-term. As your equity continues to build up (via your mortgage payments and appreciation), that negative leverage will eventually transform into positive leverage.
Nevertheless, IMHO it's always better purchase investment property using positive leverage.
Before purchasing a rental, you need to do some research.
First, you need to determine what kind of return on investment (ROI) you'd like to receive. Stated another way, you need to take a moment to think about how much you'd like to earn from the rental (aka the cashflow). Basically, cashflow is to real estate as a dividends are to stocks. Professional investors use the ROI (and other metrics) to compare the performance of multiple investment products (stocks, bonds, forex, real estate, etc), and to determine whether the yield (the cashflow or dividend) is worth the effort to acquire that investment product.
Second, you need to consider how involved you'd like to be with the rental. Do you intend to manage the property and handle the repairs by yourself? Don't make a rash decision simply to scrimp. You may find you'll save more money, effort, and time by hiring professionals to do the work. For example, if you intend to acquire multiple properties, and if you like to travel, then it might make a lot of sense for you hire those professionals: the goal here is hassle-free ownership. On the other hand, if you don't intend to acquire lots of properties, and if you enjoy doing the repairs and interacting directly with your tenants, then it makes more sense for you to become the professional (and to not hire them).
Third, after having determined your desired ROI and level of involvement, you need to collect some data: the median sales price (for single-family homes in the area you plan to acquire the rental), the absorption rate, the days on market, the vacancy rate, and median income. You can use this data to help to (dis)qualify a particular location. Ultimately, you'll need to evaluate each potential purchase with an income analysis to determine whether your rental is in a location with sufficient demand and ample resources to satisfy your bottom-line (ie your desired ROI and level of involvement).
First, you need to determine what kind of return on investment (ROI) you'd like to receive. Stated another way, you need to take a moment to think about how much you'd like to earn from the rental (aka the cashflow). Basically, cashflow is to real estate as a dividends are to stocks. Professional investors use the ROI (and other metrics) to compare the performance of multiple investment products (stocks, bonds, forex, real estate, etc), and to determine whether the yield (the cashflow or dividend) is worth the effort to acquire that investment product.
Second, you need to consider how involved you'd like to be with the rental. Do you intend to manage the property and handle the repairs by yourself? Don't make a rash decision simply to scrimp. You may find you'll save more money, effort, and time by hiring professionals to do the work. For example, if you intend to acquire multiple properties, and if you like to travel, then it might make a lot of sense for you hire those professionals: the goal here is hassle-free ownership. On the other hand, if you don't intend to acquire lots of properties, and if you enjoy doing the repairs and interacting directly with your tenants, then it makes more sense for you to become the professional (and to not hire them).
Third, after having determined your desired ROI and level of involvement, you need to collect some data: the median sales price (for single-family homes in the area you plan to acquire the rental), the absorption rate, the days on market, the vacancy rate, and median income. You can use this data to help to (dis)qualify a particular location. Ultimately, you'll need to evaluate each potential purchase with an income analysis to determine whether your rental is in a location with sufficient demand and ample resources to satisfy your bottom-line (ie your desired ROI and level of involvement).
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