If you’ve ever thought about investing in real estate, the month of March is for you. We’re focusing on real estate this month because 1) I love real estate and 2) it’s about to be spring. If ever there was a time for you to learn about real estate investing, it’s now!
One of the most important aspects of real estate is finding properties that already have value when you acquire them – in other words, bargain properties. In order for you to understand how to find bargain properties, I’m going to share some of the best tips and tricks.
How to Find the Best Bargain Properties
#1 Know What You Want
First of all, you have to establish what you want to accomplish. This allows you to say no. It also keeps you away from a property that may be a good investment but is not necessarily good for you.
Here’s what I mean by that: real estate is beginning to work for you when you have to say no to good things. This is why it’s important for you to clearly establish what you want to accomplish.
I remember looking at several haircutting franchises a couple of years ago and I began to run the numbers on them. I found out that I could buy some that allowed absentee management, so I would have been able to make some pretty good money on them. At the time, however, I was aggressively involved in real estate investing. After examining the return, I saw that they were much better for me in the real estate arena because of the team and the systems that I already had in place. Even though the franchises would have been a good opportunity, I had to say no to it. I did that because I had already established clearly what I was trying to accomplish for my life.
Some people are trying to get out of debt, others want to retire in comfort. For some of you, it may move you up and really stretch you. For some that are more sophisticated investors, you may be already beyond this particular point. A great goal to clearly establish what you want is simply this: replace your current income. When you start understanding that as your goal, it begins to clarify in your own mind what you’re looking for.
#2 Play the Numbers Game
When looking at properties, it’s important that you physically go look at them. In order to see a lot of properties, especially if they’re in other parts of the country, have an agent prescreen it based on the formula that you give them.
Finding bargain properties is a time investment. Some people say you have to look at 100 properties to get one. In my investing experience, once I give the formula for a real estate agent to begin to look at, they show me properties that align with it. The formula is the total investment needs to be no more than 80% of the real value of the property. That includes after my repair and carrying costs. In that, I also want a $300 a month spread after principle, interest, taxes, insurance, and management.
Let me say this just as a quick note: don’t become emotionally attached to properties. If the numbers don’t work, they don’t work. Don’t try to make them work, just move on and start looking at another property. There are always going to be other properties. Put a system on the ground with a real estate agent that will allow you to leverage your time so you don’t have to spend as much time looking. You let them prescreen the properties for you so you only look at the best deals.
#3 Focus on Residential Properties
The next step to finding bargain properties is focusing on residential properties, primarily single-family homes. Of course, there are also duplexes, triplexes, and four-plexes. All of those can be purchased with a regular purchase, noncommercial mortgage. This gives you the greatest advantage.
Here’s why: first of all, it’s a lower cost to enter. When looking at single-family homes, the price that you can actually purchase the property for is less than a duplex or a fourplex. Obviously, in the duplex and the fourplex, you’re getting two units or four units, but single family homes are great for just starting out, and learning real estate investing because the entry costs are lower. There is less money down and it’s easier to purchase a $100,000 house than a $500,000 apartment building. If you want to scale up later, you can bring in partners.
The second advantage of the single-family house is that it’s easier to find. There are a lot of properties to look at. The third advantage is that they’re much easier to finance. There are so many more products and people out there helping you. The fourth advantage is that they’re easier to sell. Here’s why: when you get to the duplex, the triplex, the fourplex, or up into apartments, you’re selling primarily to other investors. They tend to be more sophisticated, they understand values more and very frankly, they won’t pay you what you think the property is worth. They’re going to pay you what the property is producing in income.
#4 Look for Distressed Properties
The next key is to look primarily for distressed properties. Distressed, first of all, means the condition of the property. This is important because you want to buy properties for less than you know the real value would be. The way to know the real value of the property is more than the price because of the location of the property, the size of the property, or “fixing it up” to increase the value.
When looking for a distressed property, you want to only have to do cosmetic improvement – what I call “lipstick a property.” In order to do this, you’ve got to find a quality professional inspector and get a written report. I can’t tell you how many times that has kept me out of serious trouble. I have tried to bypass that and use less expensive inspectors. I’ve tried to just use the contractor that’s going to be doing repairs as the inspector which is a tremendous mistake. You want that third-party opinion so that it is unbiased.
A property can be distressed in the situation of a seller by the listing price of the property. For example, if I’m looking at properties in a certain neighborhood and all those properties have been listing at $100,000 and I come across a property that is listed for $75,000 in a $100,000 neighborhood, my antennas go up. Is it too small? Is it the condition of the property? You will typically find it’s a little combination of both – the property is a little run down but also the seller is very motivated.
You make money in real estate when you buy, not when you sell. The key to being a successful investor is to find bargain properties with value and playing that value up. You always want to make more on the properties than you paid for it.
Take some time to review your past real estate deals and see if you have followed the formula I have given you in this post. Have you added value to your properties? If not, how can you do that now?