You’ve found a deal that looks the part. But before you jump in, there are a few things you need to do.
Let’s talk about a deal that two of my clients, Ryan and Anna, found recently.
On paper, everything looks fantastic.
The property has a potential After Repair Value (ARV) of $175,000, and that could go into the couple’s pockets after a little renovation work. On top of that, there’s potential for the property to generate $1,400 per month in rent, which is more than enough to pay the costs of running the property.
So, we see substantial growth potential and an excellent rental yield.
But that’s not all!
The couple planned to get a mortgage offering a 75% Loan-to-Value (LTV) ratio. That means solid equity placed into the property from the beginning and less interest to pay throughout the loan.
As we said, it looks like a fantastic deal on paper.
The question now is…
Should Ryan and Anna go for it?
All of these early signs indicate they should. But at the same time, the couple doesn’t want to fall into the trap of running headfirst into a deal that ends up going sour.
And neither do you!
If you have a deal that looks this good on paper, don’t throw caution to the wind. There are still a few things you can do before you sign on the dotted line to ensure you’re really getting a deal that’s bang for the buck.
The following four tips can help you.
We mentioned a pretty high ARV when sharing Emma and Ryan’s potential deal.
However, that ARV could drop if the couple struggles to find the right contractors for the repair work. Having the wrong people on board causes delays and errors that lead to unexpected costs mounting up. And the higher the repair costs go, the lower the ARV gets.
There are two things you can do to prevent this from happening.
The first is to set your maximum construction budget. Know exactly how much you’re willing to spend to get the ARV you want and leave yourself a little wiggle room in case anything unexpected happens.
The second is to negotiate with your contractors. This is especially helpful if you’ve set a maximum budget that’s just below what the contractor wants to charge. Lean on them a little. Be honest about how much you want to spend. You may find that a good contractor is willing to lower their prices just that little bit for you to be able to bring them on board.
A good deal hinges on your ability to get suitable financing.
Let’s take Ryan and Anna’s loan with a 75% LTV as an example.
A suitable lender will recognize the relatively high downpayment as a sign that the borrower is reliable. This, in turn, should lead to some favorable conditions with the loan, such as a slightly lower interest rate. If your lender doesn’t account for your situation, you may end up paying more than you should on the loan.
But how do you find a suitable lender?
By working with a quality mortgage broker.
Brokers have industry connections that allow them to access loans you might not be able to find yourself. Just ensure that your broker has closed similar deals before and that they’re transparent with their fee structure.
Never sign a deal without spending a little time in the property’s neighborhood beforehand.
A property may look perfect when taken in isolation. However, your examination of the neighborhood may reveal why you’re getting such a “good” deal.
If the surrounding area looks chaotic and makes you feel unsafe, you’ll struggle to attract tenants. By contrast, a neighborhood that looks pleasant to live in and provides access to amenities is much more desirable.
The point is that it’s not just the house that matters.
Your tenants want to live in an area that helps them feel safe and secure. You can only know if you get that feeling when you visit the neighborhood yourself. If your gut tells you that something feels off, it might be a good idea to look for another deal.
Speaking of deals…
Notice how we mentioned the potential monthly rent for Ryan and Anna’s deal.
This indicates the couple wants to do more than buy a house, repair it, and then sell it on. They’re looking for a long-term investment that generates a cash flow.
That is an excellent position to be in.
It means that they have access to deals that don’t appeal to the typical house flipper.
Flippers tend to want to get in as cheap as possible so they can renovate and sell fast. This means they’re looking for certain types of properties, often at the lower end of the price scale.
If you intend to rent the property out, providing a nice living space is a crucial concern. In other words, you have different criteria than a flipper. Keep this in mind when examining your deal. Something that offers a good ARV may still be the wrong choice if it also provides a low potential rental yield.
Our main message with this article is to never rush into a property deal.
This is something that catches so many new real estate investors out. You see something that looks good on paper, get excited, and sign up before you’ve had a chance to really think about it.
Don’t be that person.
Take a step back and assess the whole deal.
Do you have the right loan? Is the deal suitable for your needs as an investor? How much do you intend to spend on repairs? And, is the property in an appropriate location?
Ask all of these questions to dig into the facts behind the attractive numbers.
And if you’re struggling to find the answers you’re looking for, we’re here to help. Sign up for a strategy session for our coaching program, The Portfolio Program, to find out how Open Spaces Women can help you.