Buy Investment Property Before You See It
By Steve Gillman - 2006
Why buy investment property without seeing it? Because it's
the numbers that matter most. Whether or not you look at the
property before you make the offer isn't nearly as important
as making sure the numbers make sense.
There was a man in California who used to just send out offers
on a hundred MLS listings at a time. He offered 25% less than
the asking price on each one, and occasionally a few would accept
his offer. He never looked at the homes beforehand. With an "inspection
and approval" clause in the offer, he could always back
out of the deal once he saw the house. In the meantime, he efficiently
found the truly motivated sellers.
This true story is just to demonstrate that with a good clause
or two in the contract, you don't have to worry about making
an offer before you see a property. This is true when you buy
investment property or your next home. If it isn't everything
the seller says it is, you can reject the deal with little or
no loss. This still leaves the question as to why you wouldn't
want to look at the property.
Buy Investment Property by the Numbers
Time is the main reason you might skip looking at a property
before making an offer. This is especially true if the property
is out of town. If you can't get a price that makes sense, why
spend your time traveling to look at real estate investments?
Price and terms that make sense - this is what is important.
Of course you will want to look at the property eventually, but
looking at the numbers is how you invest.
Income property is valued according to current cash flow (or
should be if you want safe and viable investments), so start
by verifying the income. Get the actual income for the past 12
months. You should look at the potential income if rents are
raised, vending machines are added, etc., but base your offer
on the current income.
Carefully verify expenses with investment properties. If any
of the expenses listed by the seller seem unusually low, they
probably are. Substitute your own best guess in place of any
suspicious numbers.
Once you determine the net operating income, apply the appropriate
capitalization rate to arrive at the value. If you aren't sure
how to do this, get help. You really should understand the principle
of how to figure a cap rate, though. Remember, this is a numbers
game you're playing.
Calculate the loan payments (talk to your banker), and see
how much cash flow you'll have. Then you can figure your cash-on-cash
return based on how much of your own money you put into the deal.
If the numbers work, you can safely make the offer. Inspections
will tell you if there are any problems that will affect the
cash flow. You can renegotiate if there are such problems (assuming
you made your approval of all inspections a contingency of the
offer). You can even go take a look now that you are ready to
buy that investment property.
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