How to Analyze Any Property in Less Than One Minute Flat!!

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How many times have you seen a run down vacant property and thought to yourself... that would be a good investment? You see it for several weeks or months and do nothing about it and all of the sudden you see someone is now rehabbing it and you see a “for sale” or “for rent” sign in the yard. Then you say to yourself... “I knew that would be a good investment! Darn, I missed that one”! You just weren’t sure how much you should offer and how much profit you should allow before making an offer.



Well, I want to take the next few minutes explaining exactly how much profit you should allow whether you are buying a fixer upper or buying a property that is already rented or ready to rent or sell.



The bad news here is that there are as many different ways to analyze a deal, as there are ways to put a deal together. There is software programs that you can purchase that will calculate your internal rate of return every year from now until the property is ultimately paid off and beyond. There are spread sheets that you can buy to do the same thing and you can even design your own. You can use a calculator or a simple pen and paper method. My point is that no matter what system you use the most important thing I can share with you is a simple computer term called “garbage in – garbage out” It doesn’t do any good to have the most complicated software program if you don’t know what kinds of margins you need or if you don’t know your repair cost and closing cost. You have to know what numbers to enter into your calculations to get the right answer.



I’m going to butt heads with a few people here but I am very much a big picture person. I don’t use all of those fancy calculations when I’m buying. I basically need to ask the seller or realtor a few specific questions and then I can make an offer on the spot before we ever get off the phone. Is that great or what? This is why I can buy 10-15 houses every month on a consistent basis.



Here are a couple of hard and fast rules of thumb. And I want you to keep in mind that they are just what I said... rules of thumb. The first rule of thumb when analyzing a deal is very simple: “If you need a calculator, it’s probably not a deal”. Let me explain. If you can look at a deal, knowing the after repaired value, the repair cost and how much they are asking then you should be able to tell whether or not it is worth pursuing. If the profit numbers are so close that you have to figure it on the calculator then you probably need to say “NEXT” and move on to the next property, after making your low ball offer of course.



Let me mention here that it is extremely important that your deals are home runs, especially your first few. That is the critical stage in your investing career that will make you stay in or get out.



The next rule of thumb is also very simple. “If you have to ask someone if it’s a deal it probably isn’t”. Lets face it, you have at least read some books, been to a seminar or two, taken an investor to lunch, listened to a teleconference or training audio or something. You know what to do for the most part. YOU can tell whether it’s a deal or not so if you have to ask someone then it probably isn’t.



Now, how do we put all this stuff to use? As I mentioned I only need to ask a few specific questions before making my first offer right over the phone. Here is what I need to know before making an offer. I need to know the after repaired value, the amount of repairs and closing cost and that’s it. And if it is a rental property then I want to know the rent or potential rent. Sure I will eventually find out more information but we are talking about getting our offer out there on the first call.



I know what your asking...How much should I pay. This is very simple. If you are looking at a fixer upper then you don’t want to have any more than 70% of after repaired value invested and this includes the purchase price, repair cost and closing cost. Keeping a margin of 30% insures that when you are finished making the necessary repairs, after closing cost you will still have 30% equity. Then you can sell it, refinance it and pull out some cash on a refinance or you can lease option the property.



Now, if you are looking at what I call an “instant landlord” property then you can pay a little more than 70% of value. After all there are no repairs to do on your part. My rule is not to pay anymore than 80% of value and maybe 85% of value if the cash flow is good and there is good possibility of appreciation.



I hope this article has helped you to determine how much you should offer for a property... FAST!

Comments(5)

  • ypochris8th May, 2007

    If it is going to be a rental property, you had better know what the taxes are going to be also- property taxes can amount to a significant percentage of the rent.



    Chris

  • ahimon11th May, 2007

    Are kidding me! Where are you going to find a property that you only have to put 70% into?? I would buys those all day and twice on Saturday!

    • ypochris15th May, 2007 Reply

      You can buy them any day of the week in Lansing, MI. Example- latest purchase:

      Cost: $35k

      Rehab expense:$15k

      After repair value: $75k

      Rent: $750/month



      I see properties like this all the time, just wish I had the time and money to deal with them all. Unfortunately since I seem to be stick on the idea (or should I say the financial feasibility) of doing it all myself, I can only handle 3-4 a year.



      Chris

    • glsmith26th May, 2007 Reply

      Well unless you live on Mars those kind of properties are everywhere. actaully 70% Is very conservative. I just acquired a property for $40k cash, with (ARV) of $120k - after few minor repairs & closing cost there's about $70k of equity there. Enough for me & my new buyer! You must know how much you want to make on a deal, before its a deal. Fifty thousand per deal is my minimum.

      • asiabank18th June, 2007 Reply

        If you can acquire a property for less than 80% of val there is little reason not to do the financing on it - for max. and then on sell the property under a wrap - providing gap financing.
        You basically lock in your profit and avoid the tax consequences of being a landlord. And if you are really savvy you can sell your note for immediate cash. .. or settle for a great annuity stream with a balloon 5 years out when the property can be refinanced by the purchaser once the val goes up further. http://markettraders.cc

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