3 Quick Tips for Investors
“In 20 years working with investors, I now have 3 Tips.”
– Scott Wilkinson, owner/broker, Uptown Dallas Properties
Adhere to the 3 Rules for Success
Rule 1 – Don’t go in with a stock market mentality, real-estate investment takes time…Don’t quit your day job!!
Rule 2 – If you are not in a position where you can always have cash reserves on hand, find another line of investing!
Rule 3 – Don’t go into real estate alone. Have someone for guidance, for good advice, make sure you do not operate in a bubble. Show them your plan, etc.…
“Make your profit when you buy.” — Real Estate Mantra
Adhere to the 3 Financing Rules of Thumb
Your basic math…..
Income » Return on Investment
But you won’t know:
- How much monthly cash flow the property produces?
- How overpriced is the property?
- What you should offer?
Rules of Thumb can help you quickly filter a property and decide if it’s worth further evaluation.
The 2% Rule of Thumb:
Determining how much to offer
- The monthly rent should be approximately 2% of the purchase price A $100K home should rent for $2,000 per month
- If a 3-bedroom home rents for $800 per month
- You should be spending around $40,000 for that property
- $800 / .02 = $40,000
The 50% Rule of Thumb:
Determining for your expenses
States that 50% of your income will be spent on expenses — not including the mortgage payment.
By dividing that number in half, you can easily see how much you’ll have left to pay the monthly mortgage (principal and interest). Any income left over after the 50% of expenses and the mortgage payment are taken out is your cash flow. An apartment building brings in $8,000 per month in income.
Using the 50% rule
- We are left with $4,000 to make the mortgage payment.
- If the monthly mortgage payment was $3,500 per month,
- You can reasonably assume a monthly cashflow of $500 per
The 50% rule is especially helpful in teaching that expenses are almost always more than one might think. One common mistake that new investors make is underestimating how much the expenses are going to cost. The 50% rule helps to show that there are always costs that are unexpected, so plan for them
The 70% Rule of Thumb:
Determining your Maximum Price
Though most often used by house flippers, the 70% rule can be used for any strategy when you want to find a good deal. The 70% rule says that you should only pay 70% of what the after-repair value is, less the repair costs.
- A home after being fixed up, should sell for approximately $200,000,
- Needs approximately $35,000 worth of work.
Using the 70% rule
- A person should multiply $200,000 by 70% to get $140,000
- Then subtract the $35,000 in repairs.
- The most a person should pay for this property, therefore, should be $105,000.
Remember, a Rule of Thumb like the ones above, is used only to quickly and efficiently screen a property and decide if it’s worth further investigation. If a property passes the above rules (or gets close), it may be worth a more detailed analysis. Don’t confuse a rule of thumb for a license to skip doing your homework.
NOTE: Check out the www.BiggerPockets.com 70% Rule Calculator to run 70% calculations on potential deals.\
Locating your Investment Properties
Use this “Hidden Gem”
Look for agents who consistently list renovated properties.
Google isn’t going to help you. You’d be hard-pressed to find a real estate agent who labels himself or herself as “investor-friendly.” Get out and network. Go to meet-ups. Ask questions. Most people love to share information.
More than likely, the investor who renovated the property is listing it with the same agent who helped them find the deal. It takes someone who has been in the trenches and gone through the ins and outs, the good and the bad of being a real estate investor, to really understand and know what other investors want.
Remember Rule #3 for success
Word of Mouth: Some homes are simply sold the old fashion way – by word of mouth. By letting everyone know that you are in the market to buy (and defining your criteria, as discussed below), you place yourself in the best position to find deals via word of mouth. You can do this directly with peers, at your local real estate club, or in the BiggerPockets Marketplace
- Will most likely have worked with other investors for at least the past 7 years. (Very Important)
- Will have access to the Multiple Listing Service: a collection of properties for sale by different real estate brokers across the country. When you search a site like Realtor.com or Redfin.com, you are actually searching the MLS.
- Will have access to Loopnet.com, the web’s largest marketplace for commercial properties. From small multifamily properties to apartment complexes, shopping malls, fast food restaurants, and more. Loopnet.com is the place to search for publicly listed commercial properties for sale.
- Can assist you in determining:
Your strategy (for example)
The “Buy and Hold” Strategy
Perhaps the most generic form of investing
- Involves purchasing a property and renting it out for a period.
- It’s probably the most simple and purest form of real estate investing and seeks to create wealth by renting the property out by collecting monthly cash flow or by simply holding the property until it can be sold for a gain in the future.
Can assist you in determining:
Your criteria List….
- Lot Size
- Property Conditions
- Number of Units
- Cap Rate
- Cash Flow
- Appreciation Potential
Can assist you in determining:
Perhaps the most common investment for most first-time investors
- Relatively easy to rent
- Easy to sell
- Easy to finance
Small multifamily properties (2-4 units) combine the financing and easy purchasing benefits of a single-family home.
- Can cash flow quite well.
- Often less competition than bidding on single family homes.
- Best of all, these properties can serve as both a solid investment as well as a personal residence for the smart investor.
Buildings are made up of between 5 and 50 units. These properties can be:
- More difficult to finance than single family or 2-4-unit properties,
- They rely on commercial lending standards, not residential ones.
- These properties often provide significant cash flow for the investor who can deal with the more management-intense nature of the properties. Instead of being priced based on comps, the value of these properties is based on the income they bring in.
This creates a huge opportunity for adding value by
- Increasing rent
- Decreasing expenses
- Managing effectively
By specifying ahead of time what criteria you are willing to look at, your search becomes much more manageable. In the same way, you can more effectively communicate your desires to others who may help you buy property. If you simply told people, “I am looking for real estate,” the most likely response would be, “Good for you…”
However, if you instead mentioned that you were looking to buy a 4 Plex in the East Dallas area for under $500,000, you enable others to think of properties that might match that description and get you connected with the deal.
We hope this helps you understand the importance of having a clearly defined set of criteria before starting your shopping, These criteria should include both personal & financial requirements.
This well-defined criteria list will help
- Narrow down your choices
- Weed out the bad properties
- Give you the best chance for a solid profitable investment that best meets your needs.
- Help you have a clear basic understanding of how the buying process works, from the first thought to getting keys in hand.