So how can you find the right property to buy for investment? I’ve created the Cash Flow Filter as a quick and easy reference guide to help you narrow down your choices. Then you can make your negotiation and purchase with confidence.
Filter #1: The Big Picture
Timing and Market
Before even considering properties, consider the timing. Is now a good time to buy? Is the market you’re considering in a recessionary period with low property values, or is it currently experiencing a boom? Based on trends, how do you anticipate the market to perform over the next five to 10 years?
Next, analyze the market in which you want to buy, whether it’s your local area or out of town. What are the property values, rental rates, and vacancy rates? Is the population growing or shrinking? Are rentals increasing or decreasing in demand? What’s the job market like?
Once you’ve found a property to analyze, the first thing to look at is location. What’s the neighborhood like? Who lives there? What amenities are available? Is the property close to schools and shopping? Will it require a long commute to work? Is it on a busy street, or a quiet street?
Price Per Square Foot
The next big-picture consideration is the price per square foot. You should know the average price per square foot in your area. That way, you can immediately tell if a property is worth looking at if it’s below the average. Anything above or close to the average will most likely get screened out, unless there are other factors that make it worth it. Anything below the average is worth looking into.
As I’ve mentioned, you should be buying at least 15% below market value. This can vary, depending on the market and where we are in the overall economic cycle. The point is to not overpay. If the property looks good, you can make a lowball offer that fits the research you do in the next filters. The number of days a property has been on the market can be an indicator whether or not a seller is ready to lower the price.
If the price per square foot looks good, your next step is to understand the seller’s motivation. Ideally, you’ll want to speak with the seller directly. If that’s not possible, see what information you can get from his or her realtor.
This is important, because the more motivated a seller is, the better deal you can get. People in distressed situations are much more flexible on price. They need to get out fast, and if you can move fast, you can solve their problems and be compensated for it. Look for sellers who need to move fast, who are behind on payments, who are going through a divorce, etc.
Filter #2: Analyze the cash flow and ROI Numbers
I’ve given you here a calculator for immediate feedback about cash flow and ROI. This calculator is also on the website at www.5DayWeekend.com.
In my next post, I’ll talk more about a second calculator we’ve created that you can use.
In the meantime, I’d love to know your thoughts about investing in real estate. Have you considered this before – or have you done it? What has been your experience? Thank you for your thoughts!
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