First and Foremost when investing in real estate, you must find great deals; not good deals, but great deals with plenty of equity, cash flow and multiple exit strategies. These types of deals can withstand mistakes, surprises and worst case scenarios such as the recent bust, where home values dropped approximately 40% in some areas and financing became extremely tight.
Here are 5 things to make sure of before purchasing investment real estate.
- Purchase at Max 70% LTV – Total cost of purchase, fees and any repairs must be a maximum of 70% of the current market value of the property. To do this you must get a lot of deals in your pipeline and cherry pick only the best ones. It is a numbers game. In some areas you can find deals at 50-60% LTV.
- Rents are 1% of purchase – A property that rents for $1000/mth should be purchased for no more than $100,000, or rents are 1% of purchase. In some areas you can find great cash flow by purchasing where rents are 1.5-3%
- Have multiple exit strategies – With equity, cash flow and flexible financing you can sell at retail, sell to an investor, wholesale, seller finance a sale, lease option, rent and hold, refinance, possibly sell the note, sell the entity holding title to the property, quick claim deed the property to transfer title, etc, etc. You have many options to make our deals successful and can withstand worst case scenarios.
- Do thorough due diligence – Always, always, always do thorough due diligence. Inspections, CMAs, multiple rehab bids, etc. No if ands or buts, do your due diligence and confirm you have a great deal.
- Consult experts – Mentors, associates, agents, contractors, local experts, local REI Club, fellow BiggerPockets members, even mail carriers and neighbors, can give you tremendous expert advice and help confirm the property is worth investing in.
Photo Credit: ElektraCute
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Article Author: Ryan MoellerRyan has written 4 articles for us.
Visit Ryan's Website: http://www.realreturnrealestate.com
As the founder of Real Return | Real Estate™, Ryan Moeller is a seasoned veteran of the real estate market — both locally in San Diego, California where Real Return | Real Estate™ is headquartered as well as across real estate markets throughout the US.
Joshua Dorkin
{ 2 comments… read them below or add one }
Great tips. Essentially you’re saying to do your homework before jumping into a property with both feet, else you find yourself in some trouble. Too many newbies just don’t realize what they are doing, think they can get rich quick thanks to the gurus out there, and get screwed. Great breakdown!
Nice summary and good advice. However, the local market will dictate what the parameters should be. If we stuck by the 1% rule for rents, then there wouldn’t be very much investing happening in Tucson. That is where the other four rules come into play.
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