3 Mistakes People Make When Buying Real Estate
I hear it all the time from people that they want the best price or negotiate the best price. To me price doesn’t really matter. What you really need to be looking for when you are doing an evaluation to be able to purchase a property is the cash flow.
Do the numbers make sense! What that means is that you want to look at all the expenses: Mortgages, cost of insurance, taxes, maintenance and property management. All those costs associated with owning a rental.
Now you want to look at the rental income, how much rents are you getting for the properties? Let’s say you look at a property that is listed at $400,000.00 and now lets say you have a similar property in a different neighborhood listed at $350,000.00. They are both 4-plexes and both have similar structures and the difference is the location. I’m sure you have heard of this saying that Real Estate is location, location, location and that is definitely a factor.
If the property that is $400.000.00 maybe the rents are higher and obviously there are more costs and expenses associated with it because it is a higher priced property and therefore the mortgage on that property would be more expensive. Or it could be a new property and that could be why it’s more expensive. Whereas, the $350,000.00 one you might think you are getting a deal because it’s the same, it’s a 4-plex and the rents might even be close, but if the expenses are higher than the net cash flow is going to be less.
So the thing to look for when evaluating a property is do not look at price but at cash flow. When I say cash flow I am also talking about long term expenses. If that $400,000.00 property was 10 years old and that $350,000.00 home was 50 years old there would be a lot more costs associated to that $350,000.00 property over the long run, so don’t just look at price.
People think that in order for them to buy a property they need/want the best interest rate. I hear it all the time, let’s say I can get them a mortgage for 4%, they will say “Oh no that is too expensive I heard of a guy who can get it for 3.97.” Sure you can shop those prices around and catch your 0 .03%.
What is important when you are trying to get financing is you want to go to someone who you trust and knows what they are doing. Also, the cost of money is not as important as the availability of money. What that means is you may think your interest rate on that loan is so high because its 4% and you were really looking at 2.5% and you take that 4%.
I mean I have one property at 11% on a first mortgage and that thing cash flows like crazy. But it was a deal the owner took back 100% loan to value and I was really happy to pay that 11% because I make about $400.00 a door on that property that is a duplex.
So again, the second thing to look at when evaluating a property is don’t get caught up in the interest rate of the loans that you are looking at.
Now it’s time to look at your tenants. A lot of people get worried and scared that they will start running into vacancies. So they start interviewing tenants and they get scared that they are carrying the property so they start to ease up on their requirements on qualifying a tenant. Worst thing you can do.
I have had properties that took me 3-6 months to get rid of a tenant. An empty unit is much better than a unit with a bad tenant. That is a very important statement. Don’t get hung up on negative cash flow and you end up putting someone in there that just ends up being a big headache. On the surface sure, it looks good because you are cash flowing because you have that tenant. However, if they are in there and destroying the place or start paying the hassle and damage is harder to your cash flow.
Due your due diligence on your tenant, make sure that you have a good tenant in there that is paying and that has a good credit history or at least good rental history. Do your evaluation properly so you don’t give up your unit to a bad tenant that in the end will cost you more.