I know we have all heard the old cliché, “Watch what you wish for…because you just may get it.”
I'm sure even most of us have used the phrase to urge friends or family to use caution before proceeding forward with their plans. As a young man I believed the people that used the phrase were either jealous or just possessed a very pessimistic outlook on life. According to the dictionary, the word cliché is described as an overused expression that has lost its original effectiveness. As I mature, I find myself reciting this same phrase, that can easily be misconstrued by the person receiving this phrase. I now know that the people who shared that old line with me were simply concerned for my well being and trying to protect me from the pitfalls that may lie ahead. Please take heed the next time someone uses that phrase with you.
I want to shout that phrase loud and clear to all of the folks who want to try their hand at flipping houses or becoming a landlord. I have no desire to get involved in this practice that has been around for years, but has recently become very trendy and tempting to many. I have had many conversations, at length, with those who have made this their primary business and with others who just dabble in it. The stories range from highly successful and profitable to the shocking and unbelievable. This reminds me of another cliché that hints that taking great risks, brings great rewards. Conversely, great risks should still be calculated as such and not entered into without doing your homework and even developing a proven formula for success.
Purchasing a home for resale or to be used as a rental, requires that you “get in” at the right price. One successful business owner shared with me his formula that he developed on purchasing homes. He found that he must be disciplined when purchasing, and not become emotionally attached to the amenities of the property. He begins with the potential appraised value of the property after improvements. This is based on comparative home sales in the area with similar square footage and amenities. He first subtracts the profit margin he must make on the deal, followed by hard costs such as mechanical repairs and cosmetic repairs, followed by miscellaneous fees and even provides room for the old “what if” problems that often occur. (See the example below.)
This means to meet his desired profit he must purchase the home for a price at 50% or less than the potential value. Many factors can cut into that desired profit margin if you are not careful and go overboard on improvements. Putting in extra high dollar amenities will not always bring high dollar returns. Make it nice but don't blow the budget hoping to get it back in the sale price.
I definetly do not want to discourage anyone for stepping up to buy their first investment property.
This is a great time to buy a home at a discount due to the declining values here in the area.
One of the downsides to the market now versus 3 years ago is finding a buyer who can secure very restrictive bank financing. Due to the lack of flexible financing, you may have to wear another hat, the hat of a landlord. That role will come with many day to day issues that may not be your cup of tea.
Best of luck and please remember that old Latin phrase Caveat Emptor that means, “Let The Buyer Beware.”
Example:
Potential Value $100,000.00
Desired Profit -$30,000.00
Improvements -$15,000.00
“What if” costs -$ 5,000.00
Misc. Fees -$ 3,000.00
Equals: Need to buy at price $47,000.00
