| Is This Property Worth My Time?
Deciding whether
you should spend time dealing with a specific property and property owner is going to
depend on the amount of available time you have along with the amount of cash and credit
you have available. The question you need to ask is:
What do I want
to do with the property?
Puchasing a
property for quick resale, along with a dollar or two in profit, is a far different plan
than purchasing a property knowing that you want to keep it as a long term rental and make
your profit over time. Buying for one reason, then changing plans midstream can kill
your investing path quicker than you'd believe. Here's how it can happen.
Let's assume you have a fairly small amount of working capital and have found a property
you are confident can be quickly resold for a reasonable profit. You use most of
your working capital to buy the property, then discover you can't realize as much profit
as you originally thought, so it crosses your mind to rent the property out. That's
not a bad plan, except you no longer have working capital and unless you bought the
property very,very cheap, you are going to have a tough time refinancing to get your
capital back out.
Purchasing
for rental purposes is a lot more straight-forward. You know your money will be tied
up, but as long as you did your homework on rental values in the area, you'll get your
market rent(or close to it) and shouldn't have any problem making the payments and
collecting a little monthly cash flow. As long as you don't need to sell, you just
need to work on building your working capital back up.
The way to
avoid many problems is to buy right!
Buying below the current market value of a property is the best way to
prevent loss of capital or loss of liquidity. What is buying right? That's a
variable answer, with you controlling most of the variables. If you have consistent
income that allows you to save and invest, buying rental properties is an excellent way to
build long-term wealth. It's not quick and glamorous, it's just a practical fairly
low-risk savings plan. However, if you are more interested in the concept of making
money with the purchase and resale of property, you have to pay close attention to area
housing values and the prices you pay.
Buying Right,
Every Time
The
only way to know the maximum price you could pay for a property, is to know the price you
could re-sell that property for on the open market. The way to determine that resale
price is to determine what the comparable sales in the area have been. The quick
explanation for comparable sales is they are properties in the same area that have roughly
the same living area and features as the property you are interested in. You can
find a more detailed explanation of comparable sales by clicking here. When you know
what the property will sell for, you'll need to subtract the cost to sell the property,
subtract the cost to repair the property and subtract the cost for holding the property to
determine a break-even point.
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