As a real estate investor I am often asked how to determine if a property would be a good investment. How many times have you seen a property just sitting there and you are wondering if the property would be a good investment for you? But you were afraid to act because you just weren’t sure how much you should offer and how much profit you should factor into the deal before making an offer.
Here are four rules of thumb:
· First, you need to know your numbers. Do you know the After Repair Value (ARV), the Repair Cost Estimate (RCE) and Asking Price (AP)? With the knowledge of these three numbers, you should be able to tell whether it’s a good deal or not.
· Second, you need a real estate coach or mentor to discuss your investment options. Find someone you trust and who has experience in investing in the type of real estate that you are pursuing. Some people say that coaching is expensive. But I say that without a good coach, it could be really expensive if you make a mistake.
· Third, you need to determine how much to offer for the property. If you are looking at a fixer upper then you don’t want to have any more than 70% of After Repair Value (ARV) invested. Keeping a margin of 30% insures that when you are finished making the necessary repairs and after closing cost you will still have 30% equity. Then you can sell it, or refinance it and pull out some cash, or you can enter a lease option deal.
· Fourth, if you are looking at what I call an “instant landlord” property then you can pay a little more than 70% of value because you do not have any repair costs. My rule is not to pay any more than 80-85% of value. Perhaps you can offer up to 85% of value, if the cash flow is good and there is good possibility of appreciation.
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