Real Estate Investing
by Kyle Koller
| October 19, 2009
Many investors have a favorite strategy for weeding through the numerous income properties on the market in their search of a solid investment. Some use the “price-per-door” as a benchmark. Others consider the “gross rent multiplier (GRM)”. Yet others are convinced that capitalization (cap) rates are the way to go.
Which evaluation tool is best?
Investors have asked me the above question numerous times. A more profound question would be, “Is there really a BEST way? Let alone a right or wrong way?” Let’s explore some of the common comparison strategies.
Price-per-square foot
This technique is extremely easy to apply. Simply take the building price and divide by the number of total square footage of improvements. Thus, a 12,000 square-foot property with a list price of $1 million has a price-per-square foot of $83.33/sq. ft. This can be a useful tool when comparing different properties in a demographic area. It is not, however, without its limitations. For example, this method does not take income or expenses into account. Evaluating a property exclusively with this method and you could find yourself money pit and you wouldn’t even know it.
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Real Estate Investing
by Justin Pierce
| October 18, 2009
Knowing what to pay for a home is critical in the rehabbing game. I’ve come up with my own method for determining my purchase price for a property. While I don’t think my method will work for everybody, maybe it will give you a good place to start or perhaps, some new ideas.
There are a lot of different variables that you’ll have to take into account on any specific deal; I’m interested to know from other rehabbers how their math looks.
Calculating the Purchase Price for a Rehab Property
Step 1: Know the value of the property. – That is the resale, after repairs value of the home. Make sure you view actual recent comparable sales. Once I feel confident I know what a property is worth I deduct 26% from that price. 20% is what I like to shoot for in a profit. With the market firming up here lately I’ve been cutting that margin to 16% on real good deals. On bigger deals or on deals that feel a little more risky I stay firm with the 20%. I wouldn’t go much lower than 16%.
Historically homes sell on average for something around 8% less than asking price. If you’re only pricing in a 10% profit then you might end up just doing a practice flip. A practice flip is a deal where you don’t make any money. Essentially you donate all of your time and effort for free to the end home buyer. The other 6% is the number I put in for closing costs when I sell the home. I’m a licensed Realtor so I list the home myself, which will save me a little. So in my case, 4% goes to Realtor fees and the other 2% is what I budget for other closing costs. You can choose to try to sell the home yourself and save the Realtor commission. If you are not a Realtor and you plan on hiring a Realtor then you probably will need to budget 6% for the Realtor fees plus another 2-3% for closing costs. I always anticipate having to pay some of my buyers closing costs.
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Can scripts hurt or help you when screening motivated sellers? This is a debatable question and I’m going to address both sides.
Round Robin Auctions are an awesome way to sell your properties quickly – fully or partially rehabbed homes or even a personal residence — because they create a sense of urgency, generate a lot of foot traffic, and help you to get the best offer that the market demands at that time. While I’ve only done this once, my mentor has done it successfully over and over again for years regardless of the market conditions. It works.
A couple of years ago, I was talking to a customer for my property management software who was based in Ulan Bator, Mongolia. “Mongolia!” I said. “Holy cow! Why are you investing out there?”
If you’ve read through a couple of Real Estate Investing books, purchased a course or two, and/or frequently read Real Estate websites, then you’re more than familiar with the typical life events that create motivated sellers of Real Estate.
Joshua Dorkin
Charles Feldman
Ted Karsch.
