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Buy Investment Property Before You See It

By - 2006

Why buy investment property without seeing it? Because it's the numbers that matter most. Whether or not you look at the property before you make the offer isn't nearly as important as making sure the numbers make sense.

There was a man in California who used to just send out offers on a hundred MLS listings at a time. He offered 25% less than the asking price on each one, and occasionally a few would accept his offer. He never looked at the homes beforehand. With an "inspection and approval" clause in the offer, he could always back out of the deal once he saw the house. In the meantime, he efficiently found the truly motivated sellers.

This true story is just to demonstrate that with a good clause or two in the contract, you don't have to worry about making an offer before you see a property. This is true when you buy investment property or your next home. If it isn't everything the seller says it is, you can reject the deal with little or no loss. This still leaves the question as to why you wouldn't want to look at the property.

Buy Investment Property by the Numbers

Time is the main reason you might skip looking at a property before making an offer. This is especially true if the property is out of town. If you can't get a price that makes sense, why spend your time traveling to look at real estate investments? Price and terms that make sense - this is what is important. Of course you will want to look at the property eventually, but looking at the numbers is how you invest.

Income property is valued according to current cash flow (or should be if you want safe and viable investments), so start by verifying the income. Get the actual income for the past 12 months. You should look at the potential income if rents are raised, vending machines are added, etc., but base your offer on the current income.

Carefully verify expenses with investment properties. If any of the expenses listed by the seller seem unusually low, they probably are. Substitute your own best guess in place of any suspicious numbers.

Once you determine the net operating income, apply the appropriate capitalization rate to arrive at the value. If you aren't sure how to do this, get help. You really should understand the principle of how to figure a cap rate, though. Remember, this is a numbers game you're playing.

Calculate the loan payments (talk to your banker), and see how much cash flow you'll have. Then you can figure your cash-on-cash return based on how much of your own money you put into the deal.

If the numbers work, you can safely make the offer. Inspections will tell you if there are any problems that will affect the cash flow. You can renegotiate if there are such problems (assuming you made your approval of all inspections a contingency of the offer). You can even go take a look now that you are ready to buy that investment property.


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