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10 Steps to Evaluate an Investment

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Flips

  1. Is the property in stable neighborhood? You might find a prospective purchase that is so cheap it’s too hard to pass up. But maybe it’s so cheap because nobody wants to live in the area. Low prices don’t always mean you’ve found a good deal. It needs to be in an area with current or imminent demand.
  2. Are your funds ready to go? When you flip, you don’t have time to shop around for financing. The longer you hold onto the property the more it will cost you.
  3. Get the absolute lowest price you can and compare that with what your agent says it will sell for once in a marketable condition and how many days it will take to sell.
  4. Walk through the property with your contractor to identify what needs fixing then determine how much it will cost. Order an independent property inspection to look for potential issues you may not notice at your first review.
  5. Will you have a ready buyer? Don’t wait until the property is completed before looking for buyers. You should have a good idea who will buy the property with names in your database.

Holds

  1. As with a flip, make sure the property is in an area where rental demand is high, your financing is in place and you’ve inspected the unit thoroughly.
  2. Determine market rents for the area then compare those with what you can expect to get. You can research basic rental info online but enlist the services of your agent for more detailed research. If you’re still not sure, contact your property appraiser to perform a market rent analysis.
  3. What are your finance and maintenance costs? Your finance costs include your principal and interest as well as a monthly amount for property taxes and insurance. Don’t discount maintenance costs as well and set aside at least 10 percent of monthly rent for maintenance. Get copies of recent repair and maintenance expenses from the seller. The difference between your gross rental income and holding costs is your monthly cash flow. If it’s a negative number, it’s best to walk. Look the property up on our Investment Calculator for some quick numbers.
  4. Is the property in good shape? If not, how much will it cost to make necessary repairs? A property with multiple maintenance issues can indicate further problems down the road. A properly cared for unit will have fewer issues in the future.
  5. Will you manage the property or hire a property manager? If you need a property manager, that will add to your holding costs, reducing cash flow. After all costs are considered and your income exceeds that amount, you’ve likely found your next investment.

FREE Real Estate Investor Strategy Mini-Guide

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WebThe strategies and options available to an investor will range depending on your individual situation and current market conditions.

Think in terms of things you control and things you don’t

The things you control are the goals you set, your ability to get financing, the actual funds you have to invest, the time you have to research and execute your strategy, and your appetite for risk. Your own knowledge and skills will be a driver too, so get educated and keep learning.

The things that you can’t control like the availability of inventory at reasonable prices, low-cost financing and interest rates, rent prices, vacancy rates and other economic factors. What you are looking for are properties undervalued where you can buy and flip, or where the ratio of purchase price relative to rent is favorable in decent neighborhoods to buy and hold. Below is a depiction of some of these influencing factors.

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FREE Mini-Guide to Buying Out-of-State Properties

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There will always be situations where an investor has the motivation to invest in real estate but for any variety of reasons the local market just doesn’t provide that many opportunities. Perhaps the town has a relatively small population or maybe the investor thinks the market is overheated and wants to sit the local “boom” out. Or maybe the local real estate market is too rich for the novice investor and coming up with a 20 percent down payment on a home is unworkable. So what does the investor do? The investor can look beyond local borders for opportunities.

Investors learn how important knowing the area is, the economy, trends and demographics. Many investors like to invest in a particular area and regularly visit the neighborhood to drive by the properties they own. But what if you live in California and see an opportunity in say, Ohio? The numbers look good and you’re able to pay cash or finance an acquisition, but how can that work? What are the benefits? What is there to look out for? Open full mini-guide…

10 Things Lenders Look For While Approving Your Loan

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  1. hand shakeRates and down payment requirements differ for an owner occupied property, a second home or vacation home and a rental property. Lenders will verify the property will indeed be used as a rental. Some lenders will send an inspector to the property soon after the closing, knock on the door and see who answers if there’s some question whether or not the loan was used to finance a rental or a primary residence.
  2. Lenders look for income that has at least a two year history. It must be consistent with a likelihood of continuance for at least three years. It doesn’t matter the nature of the income be it from part time work or sales commissions. Two years of history and a likelihood of continuing in the future.
  3. Statements from bank and investment accounts used for a down payment and closing costs will be reviewed. All pages from the statement will be needed, even if one of the pages you have is blank. The source of deposits must documented. Random deposits can’t be counted toward your closing costs and down payment funds.
  4. Self-employed borrowers and those needing commission and bonus income must also provide tax returns for the previous two years.
  5. Borrowers will sign IRS form 4506-T allowing lenders to independently order copies of your federal tax returns and compare the income on those returns with the income that appears on your loan application.
  6. For your first rental property, any rental income from the unit cannot be used to help qualify. You must qualify with the new mortgage without the benefit of any rent. For subsequent purchases rental income can be used to help qualify. Lenders want to see a history of you being a landlord, verified with copies of Schedule E from your income tax returns.
  7. Some lenders limit the number of financed properties before approving a new loan request. The maximum that Fannie Mae allows is 10 but individual lenders can have their own limits, just no more than the Fannie guideline.
  8. Lenders can add additional qualifying guidelines for rental properties called “overlays” that may make it more difficult to qualify. If your loan request is declined due to an overlay, switch lenders.
  9. You can add other borrowers on a loan application to help qualify but when adding other borrowers, their current debts as well as income must be counted.
  10. Both the property as well as the borrower must be approved. The property must appraise to at least the sales price, be in good condition and be supported with recent sales in the area of similar properties. Even the best of borrowers can be declined if the property cannot be approved.