Investors need to know
Investors need to know
Things real estate investors
need to know.
Before purchasing real estate to rent or sell (flip), there are "numbers" you need to know in relation to the property. With a little knowledge, you can make educated decisions on whether or not to purchase particular investment properties. It's better to know if a property is a good buy BEFORE the purchase.
Secret • Your profit is ALWAYS made in the purchase, not the rental or sale of a property.
Never buy an investment property for retail value with the expectation it will gain value over time. You can't control the economy. You can't control the real estate market. You can't control a neighborhood's value. You can't even control your neighbors. How can you control the profitability of an investment property when all of these factors dictate it's rental income and value? You control your profitability by making educated purchases with enough room for adjustment so that they are always profitable, even in the toughest of times. You will never be able to dictate what price your property will sell or rent. The market dictates these prices. You can, however, dictate the price you are willing to pay for the purchase of a property. You have to buy at a price that gives you the profitability up front. How do you determine what the purchase price should be? With a few easy ratios and qualifying criteria called "numbers," you can determine the price you are willing to pay for the property very quickly. It doesn't matter what they are asking, the "numbers" tell what you are willing to pay. If both parties are satisfied with that price, you have a deal. If not, you move on to the next property. Here are the "numbers" you need to know to make educated purchases.
Know your Numbers!
1. Estimated repairs: A rough estimate of the costs for materials and labor to bring this property back to excellent condition.
This cost should always include labor costs for someone other than you doing the repairs. Your time is worth money too. If you provide the labor to save money then you have become part of the repair crew. If you could have hired someone to do that particular job for $10 an hour, you just worked for $10 an hour. You must still estimate the cost of the labor at $10 an hour whether you pay yourself or someone else.
Remember - By doing the labor yourself, you are not saving any money. You are earning money as one of the laborers.
All estimates should be calculated for bringing the property back to excellent condition. If you choose later to only do partial repairs, your value will lower as well. Occasionally this is the right decision. However, for calculation purposes, always estimate to excellent condition.
2. Estimated finished value: An estimate of the value this property will be worth once all repairs are complete and property has been returned to excellent condition.
This is one of the most valuable "numbers" needed to determine your purchase price. It requires data only available to licensed REALTORS® such as Janina Kinler-Bellew and Byron Bellew of the Kinler Bellew Team or a licensed appraiser. We can determine the home's finished value for free. An appraiser will cost you as much as $400 for the same estimate.
3. (100% financed) Loan To Value ratio or "LTV": A ratio that shows the percentage of the estimated finished value that would be financed if both the purchase and repairs were fully included in the loan.
Currently, banks will lend no greater than 80% LTV. Many will only do 70%.
Example • Property cost $40,000. Estimated repairs are $30,000. Upon completion of all repairs, the property will be worth $100,000. If you financed $70,000 which includes the purchase and repairs, your loan is 70% of its estimated value. The loan to value ratio (LTV) is 70%.
Never include money that you are willing to put as a down payment in this ratio. The numbers should work without your money first. Why would you invest even one dollar into a bad deal? Once the numbers show you it's a good deal, investing money in the form of a down payment is just fine.
4. Estimated rent: An estimate of the monthly rental income for this property.
Just as "estimated value" requires a REALTOR® or appraiser, so does "estimated rent. " We can determine this number for you absolutely free.
5. Estimated monthly expenses: All recurring costs for owning the property including: mortgage payment, insurance divided monthly, property taxes divided monthly, etc.
$700 mortgage payment
$100 insurance divided monthly
$180 property taxes divided monthly
$20 termite contract divided monthly
$1000 Total monthly expenses
6. Estimated debt service ratio: Sometimes called the Debt Coverage Ratio, it is a ratio that shows how much cash is available from rental income after paying all monthly expenses including an estimated vacancy rate and unforeseen repairs.
Most lenders want this ratio to be greater than 1.25. Many are currently looking for 1.4 and above.
$1000 Estimated monthly expenses
$150 Vacancy Rate (calculate 10% of monthly rent for vacancy rate. We used $1500 rent per month.)
$150 Monthly repairs (calculate 10% of monthly rent for repairs. We used $1500 rent per month.)
$1300 Total monthly expenses including vacancy rate and repairs
$1500 (rent) ÷ $1300 (expenses) = 1.15 debt service ratio
Another way to view this number would be that rent brings 115% of the full monthly cost to own this property. 1.15 converted into a percent = 115%
Putting it all together.
Once you have all of your numbers, you can calculate whether a property is a good deal. The calculations are done almost in reverse. Here is how it works:
STEP 1 - Determine maximum purchase price according based on LTV.
1. (Estimated finished value) x (LTV) = (maximum investment)
2. (maximum investment) - (estimated repairs) = (maximum purchase price)
Step 2 - Determine maximum purchase price according to the debt service ratio.
1. (estimated rent) ÷ (Debt Service ratio • 1.25 minimum) = (expenses including vacancy rate and repairs to qualify for purchase)
2. (total monthly expenses) - (vacancy rate) - (repairs) - (insurance) - (taxes) - (other expenses) = (maximum monthly mortgage payment)
3. Determine the maximum price you can pay for a property with your mortgage payment equaling (maximum monthly mortgage payment)
This number depends on many factors that are beyond the scope of this informational pamphlet including interest rate, length of loan, etc.
Send us an email at firstname.lastname@example.org or call at 985-331-9898 for a list of potential investment properties. The Kinler Bellew team can show you any properties included on this list and help you evaluate whether they are good candidates for purchase.
The Kinler Bellew Team has created a simple worksheet that we provideto you for calculating the "numbers" on these potential properties
If the numbers meet your qualifications, we will help you with your offer. Upon acceptance of your offer, we will help you with every aspect of the purchase all the way to the closing table. The Kinler Bellew Team provides this complete service for free to purchasers.
In addition, when the property is ready for rental or sale, we can provide help with finding prospective tenants and buyers. We also provide property management for rentals once a tenant has leased your property. Call us for more information.
Kinler Bellew Team
Use the following worksheet in conjunction with the above information to help make smart decisions on your investment property purchases.
Written by Byron Bellew of the Kinler Bellew Team.