Posts Tagged ‘rental property’
Buy Rental Property and Budget For Resale Profits
The object of investing in real estate is to make money. Whether a rental property is purchased and held for months or for years, the goal of every real estate investor is to sell investment property for a profit.
In this article, we want to discuss how to budget for that resale profit by estimating the eventual sales price of a rental property less the total amounts that you will invest from purchase until resale.
Estimate the Sales Price First
Resale price is always dictated by the buyer. Buyers determine the price at which you can sell your income property. Never add your dream profit or rehab costs to your purchase price to estimate a future sales price for that income property. When you plan for profits, start with the price that a reasonably well informed buyer will pay for your property.
How do you determine that price? Research recently sold properties that most closely resemble your building. It is difficult to compare a 5-unit apartment building to an office complex, therefore select properties that are mostly identical to your property in configuration, condition, and location.
Appraisers and tax assessors typically use a market cap rate to estimate rental property value. So determine at what cap rate those properties on your list sold for and apply it to your own property. Don’t be shy to confirm the cap rate you plan to use with a local appraiser or a qualified real estate professional.
Stay conservative. Beware of pricing your property as if it were a cut-above the rest. For budget purposes, stay on the safe side and aim for a sales price that sits somewhat below the highest-valued income property in the area. The closer you push toward (or above) the top price limit of the area, the more difficulty you will face in trying to get your price—even when your property is expected to show clear superiority over the others.
Estimate Costs
After you’ve set a realistic sales price for the property, develop your cost estimates–what it will cost you to achieve that sales price.
Just bear in mind that investors are only going to pay you for the income that the property generates. Cost-plus pricing doesn’t work. Investors aren’t going to care how much money you put into the kitchens or landscaping, they will just be concerned about how much rent the tenants are willing to pay due to those improvements.
Structural issues, of course, are a different matter. The building must have a sound infrastructure such as a roof, electrical, and plumbing. The warning here is simply not to expect an investor to pay you for a superfluous grand over-hauling of the building.
Learning how much you might spend to upgrade the property is a skill that should develop through experience. In the meantime, until you get the hang of it, you can follow these suggestions.
1. Research materials cost. Visit home improvement suppliers, lumberyards, and hardware stores. Talk with knowledgeable store personnel. Learn alternative solutions to various types of common problems and price/quality trade-offs.
2. Educate yourself. Many home improvement centers offer classes and seminars for beginning remodelers, renovators, and rehabbers. Study books and magazines devoted to this subject.
3. Consult property inspectors. Accompany your property inspector as he performs your pre-purchase inspections. Ask for advice about potential costs and remedies.
4. Secure multiple estimates. Contractors and trades-persons typically provide free cost estimates. Discuss with them alternative ways of curing any property deficiency.
5. Talk with property owners. Ask those who have improved their properties to tell you what they know. Learn from their experiences.
Sales Price - Costs and Profit = Acquisition Price
Let’s look at an example: You find a property for sale at $500,000 that after your improvements is expected to sell in one year for $780,000. You further figure that your costs and profit to achieve that sale in one year will total as follows:
Acquisition expenses and closing costs = $5,000
Cost of borrowed funds (interest) = 20,883
Selling expenses @ 6% = 46,800
Materials for fix-up = 42,000
Labor = 22,000
Closing costs at sale = 7,800
Profit = 25,000
Total = $669,443
Result: $780,000 equals what you estimate to be the realistic selling price of the income property so you should not pay more than $610,567 for the property.
Your sales price $780,000
Less: Costs = 144,433
Less: Profit = 25,000
Maximum acquisition price = $610,567
There it is. By setting a realistic (conservative) future resale price and then backing out your costs (also realistic) and required profit, you set a top limit for your acquisition price. With this technique, as long as you accurately estimate all of the costs associated with purchasing, repairing, and disposing of the rental property, you guarantee yourself a profit in your next real estate investment.
Author: James Kobzeff
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As stock market investment is very risky in the present recession scenario, many people are opting for investing in rental property. Though the annual return of real estate investments is comparatively lower than stock markets, it is considered a stable and decent investment option. If you are a first time real estate investor, then you need to be very careful, otherwise you may land into financial problems. As a beginner in real estate investment, you are required to research on the basic rules of investment. You can talk to property owners, investment advisors to know the pros and cons of real estate investment. Following is a guide for beginners that will help you to invest in rental properties.
Understanding Cash Flow:
The first and foremost step is to understand the concept of cash flow. In simpler terms, cash flow is calculated by subtracting the housing expenses (mortgage payment and property tax) from the money that is received from the tenants per month. Positive cash flow is when the received money is more than the housing expenses; whereas, if the expenses are higher than the generated income from the property, it is called a negative cash flow.
Rules and Regulations:
Before you start any investment, read the rules and regulations of investing in rental properties. There are certain liabilities and responsibilities of real estate investments, which are specified in the country’s jurisdiction. To know more about real estate investment tips, property deals, rules and regulations, you can join the ‘landlord network’ of your area. This will help you in knowing which properties are on sale, and the ones worth buying.
Choosing Rental Property:
This is the most crucial part of investing in rental property. You can opt for single or multi-family unit or a vacation home. While searching for properties, make sure you consider locations which are in demand, so that you can find tenant easily. Such locations include areas near colleges, universities, corporate offices and good residential sites. This way, you will benefit in both ways, getting tenants and high rent charges. A property in a suitable location is also easy to sell, without incurring losses. Hence, take quality time and check for the future income potential before finalizing the properties.
Property Buying Tips:
Even if you get a good property deal in a good location, do not forget to evaluate the rental property. You can consult a professional or a real estate agent to calculate the real estate value. It is better to discuss with landlords of the area, where you are planning to purchase the property. To get a better idea about rental property tax, you can seek advice from a tax advisor or a tax professional. Always discuss with a lawyer to avoid any legal issues of rental property investments. While purchasing a rental property, make sure you buy a renters insurance.
Choosing Tenants:
After you purchase a rental property, you can start advertising, in order to find tenants as soon as possible. However, do not make haste, and also choose the tenants carefully. Make sure you analyze the creditability of the tenants for your property. Before proceeding with the formalities of renting, you can run credit checks and screen tenants, so as to minimize future problems. You should discuss the mode of transaction and also gain vital information like their background, references and permanent address. It is always advisable to collect security money from the tenants to avoid any possible risks.
Selling Rental Property:
After you purchase the investment properties, decide how long you want to own them. A long possession will require investment in repairing and maintaining the properties. Both short-term and long-term possession have their own pros and cons. However, for those who own a few properties, long-term possession is beneficial. In case of negative cash flow sell the home or property, instead of incurring loses. With this money, you can take possession of a better property. If negative cash flow continues, then saving money is impossible, rather it may affect the personal income of the investor.
It is to be noted that not all your properties will be occupied in the first months of investment. Hence, do not panic, if you earn less income in the beginning. It is commonly observed that most of the rental owners do not calculate the annual returns. Make sure that you check the cash flow and keep yourself updated about other investment options that may provide you higher returns. A major advantage of real estate investment is that it will continue to boom, as the population is increasing day-by-day and obviously, people require homes to stay.
By Ningthoujam Sandhyarani
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