Originally posted on my ActiveRain blog…but I liked it so much I thought I would bring it over here, too.
You can make quite a bit of money on the purchase of your next investment property. Yes. I said the purchase. Right now with inventories in Kansas City at historical highs and colder weather just around the corner I believe real values are going to be out there to be had. (I saw 3 today!)
TIP: Look for vacant houses in bread & butter neighborhoods close to transportation centers. Days on market of 60 or greater will play into your purchase plans. Days on market at about the 170 day mark are prime targets. The real estate agent with the listing is probably ready to lose the listing and will do just about anything to make a deal work…and salvage at least some commission.
Knowing what the true market value of a home is that you are going to bid on is of paramount importance. Work with an experienced real estate agent or appraiser to figure value. After true value has been established you are now trolling for properties that you can pick up 10% under market…or greater.
But don’t get greedy. Walking into a home with 10% bonus equity is sweet. Don’t screw it up by asking for too much. Again, experience, leverage and intuition are going to come into play here. Oh, and as from an ethical standpoint, try not to use inspections as a back-door negotiation tool. It just annoys everyone and usually doesn’t work the way you want it. If there is a glaring defect deal with it in the initial negotiations for the purchase of the said investment property. At least that is how I want it handled for my investors purchasing property in and around Kansas City.
If you have done your homework you now have a home ready to go for rental purposes. Maybe you bought it turn-key or maybe you had to get some repairs done for some additional sweat-equity. Either way you were careful to find a home in a clean, desirable neighborhood with not too many rental properties.
Hire a good property manager, or do it yourself. Advertise like crazy. Use craigslist, Hotpads and rentometer to figure out how much and to get the word out. Screen your tenants carefully but understand that the reason we have so many renters in the market right now is because their credit isn’t allowing them to buy. Be careful on their credit history but not too picky. Remember, to weigh different items in the credit report differently. Again, you may need to be working with an experienced property manager to help you assess risks.
TIP: Why hold out for and extra $25-$50 a month rent when you could have had it full a month and a half ago? It takes quite a bit of time and money to make up for even one month’s vacancy. So get it filled with a quality tenant as fast as possible at a fair price.
EVALUATING WHEN TO SELL
Each year, yes I said each year, you should be re-evaluating whether or not to hold on to that income property or to sell it. Let’s take a traditional 6 year scenario here with a fully amortized loan (sorry Brian and Jeff – for example only…we’ll counsel them at the table later) at 7% and an average of 5% a year appreciation.
Purchase Value $100,000
Purchase Price $ 92,000
Value after 6 years $134,000
Equity growth after 6 years $39,379
minus sales/exchange costs of $7,700
Net equity growth $31,679
(By the way, calculate that return based on your original $18,400 investment…and that doesn’t count allowable depreciation and a minimal/growing cash flow before taxes.)
Would now be a time to sell? I don’t know. Depends on you, your criteria, risk tolerance, growth schedule, years to retirement and current real estate market. But I can tell you one thing; By pulling out that $50,000~ you can probably now own two properties and let those grow twice as fast!
REAL ESTATE INVESTING IN KANSAS CITY
Listen, I’m told all the time what a great move buying just a few rental properties made in the lives of individuals. I know darned good and well that most readers of my blogs think that the majority of my clients own 10, 20 or 50 rental houses. And that’s just not true. Most of my real estate investors own between 1-6 income properties.
Have some fun. Sit down with a calculator. Work out growth projections and different strategies based on your goals and see how few income properties it really takes to make a difference in your life. But start. Start with one. Just start.
Real estate investing can be very profitable, rewarding and fun. It can also be extremely damaging to your financial situation and moral and a nightmare to deal with. Which of those two scenarios would you prefer? Then get started today with someone that can lead you along the path.
Allow me to offer my services. I’m a real estate agent that specializes in helping people with their residential investment property here in the Greater Kansas City area. Myself and my team are at your service.
Keller Williams Realty