Making the decision to buy an investment home means that you have decided to start thinking more like an investor than a retail consumer. Thinking more like an investor means you understand these basics in investment real estate: 

Appreciation does not really exist.  If you decide to live in your investment, appreciation does not equal equity.  You have to live somewhere, and your debt will carry over in to your next home.  Whenever you refinance and take equity, the equity will have to be replaced with debt.  You are not richer. 

 

Appreciation is only a bonus.  As an investor, you can not expect to make money on market appreciation, you must plan on making money through getting the home at a discount, through increasing the property's value through improvements, or through rental income. Appreciation should be treated only as a bonus: not an investment strategy.
 

Liabilities are not assets.  If your property does not cash flow, or have benefits beyond your expenses, then it is not an asset: it is a liability. You need to structure your deals to have multiple benefits. If you’re losing money on your investment properties, (if they're liabilities) you can only afford a few.   If you’re making money on your investment properties, you can afford as many of those assets as you can get!

Debt is not equity.  Many investors have met financial ruin simply because they did not understand that equity which is replaced with debt is not real money. Replacing your equity with debt costs your more each month, and makes you more vulnerable during market downswings, since you can become underwater on your mortgage.  Debt is not equity!

Cheap does not equal a discount. Just because something is $50,000 below market value does not mean that it is at a discount, since it may need $50,000 worth of work or repairs!  You have to factor in repair and upgrading costs into your purchase price, as well as an acceptable profit margin for yourself.

 

If you want to make money in real estate, you have to create it by increasing the home's value, by buying at a discount, or by creating financial benefits through renting your property.

Increase a home's value.  Quite often to a buyer, the perceived value of a home is strictly visual; if you can improve the appearance of a property, then the perceived value will increase as well. This is why a new coat of paint and new carpet can improve a home's value so quickly, and also why properly staging a home, and improving curb appeal is so important. You can also increase a home's value by adding square feet, or by making repairs, improvements, and updates. Remember, that the true worth of a home is only what the next buyer is willing to pay.

Buy at a discount.  Buying a home at a discount is the most popular way for new investors to make money, as there is typically not a lot of work required beyond cosmetic updates.  Often investors can find homes at a discount of 10-30% when dealing with short sales, foreclosures, or distressed properties. Your personal investment strategy will dictate what you will buy, and how much you will pay for it.  Some investors only need a slight discount so they can cash flow when renting the property; others will need a larger discount if they intend to flip the property quickly. Buying at a discount usually involves making lower offers than the asking price, and as such, there is more effort involved then when buying a retail piece of real estate.

Rent out your property.  Rental real estate has multiple potential benefits for investors. The first is principle pay down: essentially renters pay down your mortgage. The second is cash flow, since rental properties rent at a premium to mortgage value, meaning there is often extra money each month after all the bills are paid. The third benefit is a tax benefit called depreciation which lets you write off a portion of the value of your home every year. The forth benefit is appreciation which actually exists in rental properties, but not in live-in properties.  As your home appreciates, your cash flow and equity will increase as well.

 

To think like an investor, you need to know how to gauge the value of a property.

The first factor is comparable market value.  What is currently being sold in the immediate area will likely put an upper limit on your resale value.

The second factor is future value, otherwise known as price appreciation. Is the area unique or in demand?  If so, the property will likely increase in value over time.

The third factor is the true cost of ownership.  What will this property cost you to fix up and maintain?  What are the average monthly expenses, such as mortgage payments, mortgage insurance, property insurance, taxes, utilities, and association fees?

The forth factor is potential rental value. If the home will rent for equal to, or more than, your monthly expenses, then the property is a safe investment in terms of potential rental value.

 

Remember that buying an investment property is more time consuming and complicated than buying a retail property. Often there is a unique situation involved. Perhaps a homeowner is in foreclosure, maybe you’re trying to get the bank to agree to a short sale, or you could be negotiating on a bank owned property. If you really want to get a good deal, a true investment property, then it is likely you will have to make multiple offers, on a variety of homes, before one gets accepted.  With the thousands of dollars in potential profit, the effort is worth the reward.  And, we are here to help you make it happen.  Contact us today.

 

Investment Real Estate 101 -  Make your Home an Investment -  First Time Home Buyers