Welcome – Investors
- How to anticipate the profitability of a property before you buy
- How much to offer on a property
- Before you sell, take advantage of free painting, landscaping and staging
- Keep and use your SEP IRA to purchase properties.
- Never buy a property without thoroughly inspecting it first.
- Properties of Exceptional Value
1- How to anticipate the profitability of a property
A simple way to calculate the potential net profit a property will yield prior to buying it is to multiply the gross scheduled income by 55% then subtract any bank interest you will pay for a loan. This is not an absolute, but allowing 45% of the gross scheduled rent for overhead is a reasonable average of what to expect. This allows for vacancy, management, maintenance, taxes, insurance and other miscellaneous expenses. I like to keep deferred maintenance costs as part of the purchase price, that you should have in reserves when purchasing property.
Example: A fourplex scheduled to collect $1500 per unit per month would be:
$1500 X 4 units X 12 months = $72,000 annual gross scheduled rents X 55% = $39,600 net annual income. Any mortgage payments need to be subtracted from this.
Disclaimer: The above is not absolute but a good conservative approach to predicting profitability.
Facts affecting a rental property’s net income:
1) High maintenance + high tenant turnover can bring expenses to over 55% of gross scheduled rents. Low maintenance + low tenant turnover + self management can drop expenses to under 30% of gross scheduled rents.
2) On average, studio and one bedroom apartments have slightly higher tenant turnover compared to two and three bedroom apartments. That is to say, tenants move out slightly more frequently from studio and one bedroom apartments.
3) Properties converted to multi-units versus properties designed as such often incur more maintenance.
4) Above average rents for a property’s location, size, condition and amenities causes one of the largest expenses a property can have, Vacancy and between tenant apartment refurbishing costs known as “turnover costs”.
5) Not following rental laws can cost you more money and headaches than you can imagine so be wise and obey rental laws.
2 – How much you should offer
Today, every property for sale has 10 buyers bidding to buy it.
Supply and demand method:
Look to see how much every home of comparable size, amenities and condition, within 1/4 mile, has sold for over the last few months. Average the selling price and add 2%. Remember, yours will be one of many offers and the sellers need a reason to pick yours. The likelihood of your offer closing escrow is weighed by sellers also. Sellers see a cash buyer as more likely to close than a financing buyer. This being said, finance buyers often need to outbid cash buyers to look attractive to sellers. There are other nuances to make a financed offer more attractive such as being over qualified for the loan and having more cash than necessary to close if the appraisal come in lower than expected.
Income producing method:
Look at the total anticipated cost of acquiring and renting a property. Include the sale price, closing costs, needed repairs, cost of deferred maintenance and cost of vacancy and tenant placement. Using this final, total cost of the property, use the CAP rate formula in section 1 of this page to calculate the annual return. Adjust your offer to keep the annual return in your comfort zone. I recommend the annual profit needs to exceed current mortgage interest rates to allow for financing.
3 – If selling a property, be sure to consider our free painting, free landscaping and free staging as part of our FREE MAKEOVER.
If you are selling a property that has been a rental for a while or is simply not looking 100%, I can improve the look of your property with color consulting and painting, landscaping and its design, and furnishings that enhance the beauty of you property. I usually provide these services at no cost to my clients when in contract to list and sell their real estate. You can see my referrals on Yelp (be sure to also view the filtered section). Or go to the Free Staging section in this website.
4 – Keep and use your SEP IRA to purchase properties.
If you have a SEP IRA you are allowed to have it invested. Real estate is an allowed investment; however you need to work with banks that will facilitate this for you. Here are two I have found, recommended by my clients. Equity Trust and Provident Trust Group
5 – Never buy a property without thoroughly inspecting it first.
The real estate market is so hectic these days, often purchases need to be decided quickly; however, you should keep and exercise your right to thoroughly inspect a property after you have an accepted offer. This needs to be done prior to releasing your inspection contingency by action or time lapse. I recommend you accompany your inspectors to see first-hand what they find. I have been to hundreds of property inspections and will assist you in this process. This help ranges from spotting something the inspectors missed to translating from contractorese to English.
6 – Properties of Exceptional Value
I continually scour through thousands of properties offered for sale to find what I consider to be properties that yield a better return on investment and mitigate your capital investment risk. Contact me if you want my help or if you have any questions. 707 332 8301 or or firstname.lastname@example.org or browse the MLS for yourself. You can see my referrals on Yelp (be sure to also view the filtered section). Or go to the referrals section of this website.