FACTORS TO CONSIDER WHEN BUYING AN INVESTMENT PROPERTY

 

Creating additional income through investment properties has been around for centuries.  People who seize the opportunity to increase their personal holdings do so for various reason.  Creating an investment strategy is key. Creating an exit strategy is equally important as well.

Let us look at Six Key Factors when creating an investment strategy.

1. Location, Location, Location.  It is a tired old phrase but is ten thousand percent true.  Purchasing the right house in the wrong location can lead to disaster.  In this case purchasing with your emotions has to be secondary to purchasing with a clear logic.  Location is #1 importance; the property is 2nd. 

2. Down payment difference. Unlike purchasing a traditional residence, investment properties require a significant uptick in down payment.  Depending upon the property one may have to increase the down payment to 15-25%.

3. The 1% Rule. As an investor you want to receive a rate of return on your investment.  The 1% Rule is your minimum standard.  Example: Your purchase a property for $250,000 you need no less than $2,500 in rental income per month to make the investment pay for itself.

4. Fixed and Variable Expenses.  There is nothing surprising here as an investor you will have expenses associated with the care and up keep of your investment.  These monthly and yearly expenses must be calculated into the overall plan for the property.

5. Property Management. Unless you plan to live on or near the investment property you may have to use the services of a Property Management firm.  Cost for these services may vary from location to location and may be beneficial as your portfolio increases.

6. Exit Strategy. What is your strategy for disposition of the property?  Will you maintain it for 5 -10 years or for your lifetime?  Create an escape plan at the outset and change as your financial plan evolves.

Bottom Line: Many investors have done well with investment properties and investment properties have been an excellent source of income for retirement. 

VETERANS HOME LOANS

 Note: Please consult your nearest veterans affairs office for complete details on the Veterans Home Loan Guaranty program.

There is an old saying in the military that goes something like this regarding benefits: "If you don't use them; you lose them."

Besides the "GI Bill" educational benefits program, the home loans program is one many veterans utilize to purchase their first home, farm, ranch or condominium.

Here is a brief overview of the documents you will need to include with your loan package.

1. Certificate of Eligibility (COE)

2. Uniform Residential Loan Application 

3. Proof of Income

4. Documents of Outstanding debts

5. Homeowner's or Association forms (if applicable)

6. Gift letter for funds provided by someone not involved with the sale.

7. VA service-connected disability award letter if not noted on the COE (if applicable)

8. Condo forms (if applicable)

As a veteran you have earned the right to these benefits.  It is to your advantage to utilize them as soon as possible upon discharge from the military. Don't lose them, use them!

Google: VA Home Loan Guaranty Buyers Guide for a printable guide to help you navigate the process.

FACTORS USED TO ESTABLISH A HOME'S LISTING PRICE

 Let's examine the key elements necessary to establish a listing price for a home.  Last week we discussed the core value of a property. The core value is the bedrock of a home's listing price.  Now we will briefly examine other factors which contribute to that price.

1. Adjusted core value: There are other variables that can increase or decrease the core value of any property such as: is it near a highway, wetlands on the property, views, celebrity value, no air conditioning or dated.

2. Comparative prices of all past sales: How does this property compare to other properties that have sold or are currently on the market?  

3. What else is available?: Are there other similar properties currently available on the market?  How does this property match up against the others?

4. Third party input: What is the appraised value of the property?  The reasonable businessperson rule: "Will any reasonable businessperson pay what the seller expects?"

5. Seller's motivation: How motivated is the seller?  How responsive are they to the current market's valuation of their home?

6. Setting the asking price: The asking price should become apparent as you move through the process.  In the end the asking price must be high enough that the seller does not feel that he/she will be leaving money on the table, but it must be credible and defensible to attract buyers.

Bottom Line: When all is said and done the asking price is only as good as the buyers it attracts.

ESTABLISHNG CORE VALUE FOR YOUR HOME

 Core value is the bedrock value for your home.  It has nothing to do with market value or the asking price or with the price you will get for your house when you sell.

Core value is always subjective to interpretation.  Core value is the starting point for setting the asking price.

What are the components for determining core value?

The key components:

1. The Land Value.  What is the value of the land without the home and improvements?  Determine a high-low range for the basic value of the land.

2. The Replacement Value for Improvements. What is the cost to build this house per square in the current market?  

3. The Replacement Cost for Age. The simple formula for determining replacement cost is: Replacement Value divided by the anticipated home's life multiplied by the current age of the house.  This nets a value adjusted for obsolescence.

4. The Range of Amenities.  The list of amenities can vary so it is best to check your local market's view of amenities.  Suggested amenities can include a pool, fencing, outdoor spa, tennis court, and landscaping.  It may be difficult to put a value on the amenities, but ask "How much would a buyer value this amenity today in its present condition?"

Bottom Line: The Core Value is now the foundational value upon which you will construct the recommended asking price.  

Next week we'll look at other factors when added to the Core Value make up the Asking Price.

WELCOME TO 2023!

Welcome to 2023!  At the start of each year, folks often take time to "resolve" to do something new in the new year.  For some the "resolve" is a paper project yielding little if any real change or progress.  For others, "resolve" is a bit more enduring, at least through the first week to 10 days. There is that singularly small group who "resolve" not to quit at any price.  Kudos to that group of well disciplined folks who have what it takes to see their resolve through to the end.

Since this is a blog about real estate it only seems logical that there be "resolve" in the coming year as far as content is concerned.  Here are a five "resolves" for the new year:

1. Resolve to provide meaningful content to assist Seller, Buyers, Renters, and Investors with their future real estate dealings.

2. Resolve to respond reader's request for information on real estate related current events.

3. Resolve not to provide any legal or financial advice.

4. Resolve to present balanced content on real estate matters.

5. Resolve to be a trusted source of real estate information.  

The new year offers numerous unseen opportunities for  all who are invested in the real estate market. May the days ahead prove our "resolve" to make 2023 a banner year both personally and professionally.