I'm just begining to look at properties for my first investment. I've looked at several on paper and have found a few that look like they would generate decent cash flow. Assuming no significant issues (such as repairs, etc.) that would cause an investor to avoid the proerty, why hasn't someone else purchased the property if they would generate a good cash flow? I guess I'm wondering what your experience has been regarding finding properties with good cash flow that seem to be sitting on the market for no good reason. Is it because there aren't that many real estate investors (i.e. too little demand)? I'm concnerned the property is falling in the too good to be true category, but I don't have enough experiecne to determine what is "too good."I hope my question/issue is clear. Thanks for any replies.
Make sure you have a really good, realistic handle on maintenance and repair costs. Have you inspected the property? Is everything in compliance with local codes?
There is no shortage of folks looking to jump on the right deal. Most things that look too good to be true--are.
At the end of the day it's your decision. Double check everything, ask to see as much documentation as possible--a landlord's prior tax returns almost never underestimate the costs of repairs and maintenance.
Do the necessary pre-purchase work and trust your gut!
Originally posted by "GarGus":
a landlord's prior tax returns almost never underestimate the costs of repairs and maintenance.
Ok, forgive me, but I am very much a newbie. Could you go into a little more detail with this statement?
thanks in advance...
Monty, When looking at the maintance history of a potential property, the sellers income tax return will show what they claimed as repairs. They may not show this amount on a pro -forma. It's like having two sets of books. The info in the return is most likely more accurate. By the way, Loved your TV show.
i see now... thanks for the info guys!
Regarding the first post. If it has been on the market for awhile and no one has bought it it is more than likely NOT going to work out. Investors swoop up good deals like candy. I would STRONGLY suggest you get an APOD and do an analysis. Dont have an APOD, do a search for one or I can send a copy. It is an excel tool that ask lots of questions and then does an analysis to show if a property will actually be a cash flow property. Also, make sure to get a GOOD inspector to look at the property. They can give you all kinds of details about the property that will help you decide if the thing is going to fall apart the first month. That will help with your analysis. The KEY here is to imagine every posible contingency and take that into consideration BEFORE you jump in. If after you have done all that and the numbers still work then go for it. The more often you do these analysis, the quicker you will get at locating a cash cow or a dead dog, and the faster you will be able to get your deal before an experienced investor swoops in and grabs your diamond in the rough. Dont forget to verify rental rates for the area and dont be optimistic. You will be in the market with all the rest of us who have done our homework and will have our property listed for an accurate rental price.
To add to the tax statement. If the property has been a rental before you can certainly ask to see the tax statements, income statements, rental rolls (for multiple unit properties) etc. They will help you make an informed decision. However, if the property was just someones home then you are going to have to revert back to doing your own analysis.
Biggest key here is make sure you think of everything and take it into account BEFORE you spend your grocery money on a property. YOu dont want to be eating macaroni because you made a poor choice.
Not sure what exactly an APOD is...but can you send me one?
Thanks Gaterunner, I'd really appreciate it if you could email me the APOD you use.
An APOD is a little tool that will help you decide if a property will cash flow or not. Very useful. YOu enter in all the pertinent details and it will give you your annual cash flow, taxes consequences, and tons of other info. For me it is a vital part of my analysis on rentals.
Gateruner, Any chance you can email me the APOD you are discussing? Thanks
The rental property business is ALL ABOUT THE NUMBERS. Why not post the purchase price and gross rents and let the forum take a look. Then, we can see if this is too good to be true or not (or even a good deal for that matter). Many times, new investors don't understand operating expenses and think they are getting a lot of cash flow when they are not. Of course, you also need to know the repairs needed and only you can do that.
If this is really a GREAT deal (I doubt it), someone will usually scoop it up quickly. Therefore, you must understand the purchase price vs. cash flow issue so that you can quickly make an offer on GREAT deals. When someone calls me with a GREAT deal, I drop what I'm doing and go look at it NOW. Then, after spending a few minutes walking through the property, I make an offer right there on the spot and immediately sign a purchase contract if the owner agrees to my price. The whole process from phone call to signed contract can be 1-2 hours.
Great deals do exist. When you find them, you've got to be ready to move. However, you must also know what a good deal is.
Originally posted by "**********":
BTW, I was blown away to hear that operating costs on a rental prop run 50% of the rents!
Just to clarify, the 50% number is a heuristic based on analysis historical records. There is no real dependency between gross rent and expenses; it is just that the numbers seem to correlate in that manner. For example, if you are renting a property at $800/month, then the 50% number would estimate expenses of $400/month on average over the long run. However, if the market changes and you can suddenly rent this same property for $900/month, there is no reason to expect that expenses would suddenly become $450/month on average over the long run (unless, perhaps, property tax increases as well -- so it's not 100% clear cut).
Point is, it's a estimator. As has been pointed out a number of times, when you filter down to a good candidate property, you still need to perform due diligence and to run the numbers at a lower level of detail.