One of the key points of my investment strategy in properties that I buy to rent is to get the best purchase price. It is not easy to buy properties underneath their market value, but it is very important to achieve it for various reasons.
Is the purchase goal is to add profitability to the asset; it is key to get a good offer for the purchase of the property.
A purchase price underneath the market allows you to build an invertible net present value, increase the cash flow and sell the property if there is a problem.
I talk about how to buy properties underneath its market value, but ¿how can you determine a great offer on a rent property?
How to determine the market value in rent properties?
The first step comes form understanding what market value is. Once you know that you need to know how low you want to go to purchase the asset, because buying a property for 1 euro less than its’ market value isn’t a great deal.
How low from its’ market value do you have to go for an offer to be good?
When I buy rental properties, I establish a purchase goal of at least 20% lower than the market price. The reason why I buy them so low is because I want to have a good cash flow, that is why the lower the price the higher the cash flow.
Doing these acquisitions in prices lower to the market allows me to an easiest refinance and building a good wealth at a reasonable price. The more of this that I have more opportunities I will have to obtain lends from the bank to keep on buying. My plan is to purchase 10 rental properties this month.
In deed I don’t think that you need to buy a rental property 20% lower to its’ market value for it to be a good offer. You need to decide for yourself how much you need from each business.
The lowest form the market value the hardest it will be to find rental properties. That is why it is basic that you surround yourself of a good real estate adviser who shows you investment product at a reasonable price. In Cat Real Estate we specialize in that. On the other hand, I already tell you that if you want a property 50% underneath its’ market value, you will never get that property.
How do remodeling affect the purchase of a property below market value?
Some people ask me: “What can I do to buy a property that is 20.000€ below market value, taking into account that this house needs 20.000€ in work?
Renovations increase property value. But be careful sometimes people don’t qualify the renovation value well and it ends up being more expensive.
A house value will vary depending on its condition. If your property needs 20.000€ worth of remodeling, its final value will not be the purchase price plus the refurbishment, you will need to add 20% to the final value. This is statistical data on my experience in buying assets that need renovations.
How do you calculate a good offer on a rental property that needs remodeling?
I use the same formula for houses that need work and the ones that don’t.
The market will vary for each one depending on how much discount the buyers will ask over the properties that they will buy and remodel.
In some markets specially in those where stock housing is high a real estate investor can ask for a big discount for the property that need a lot of work. In other markets where stock is low owners can be harsher in negotiations and you might not get a big discount. You need to seek for a balanced market but markets tend to be low on stock.
I want to buy a rental property at a price that is 20% lower than its market value so I can remodel it. If a house costs 150,000€, I need to buy it at least for 120,000 minus the work it needs. Hypothetically, this house will require renovations worth 15000€, then I will need to purchase the house for 105,000€. That will be my investment goal.
I will be available to sell this property once the remodeling is done for 180.000€, then my profit will be 60.000€ or 50% over the price and refurbishing value.
The more work the property needs the bigger the discount I’ll ask for because I will need more time to remodel it and I need to take care of those costs.
Do I always but 20% lower from market value?
When I look at my properties I realize that there are a few purchases where I haven’t accomplished the 20% rule.
But they have all been next to 20%. The eighth property I bought might have been the one furthest apart form my 20% goal. For most purchases I do I need 10,000€ in extra work for the property but in this eighth one I needed less than 2.000€. Because this cost was so low my cash flow looked go so I decided to invest.
Obtaining a good offer on a rental property is one of those things that make a great purchase. When you are buying a new property you need to make sure that you are getting a good cash flow.
We all have a different idea of the discount we need for a good business to take place.
I want to buy properties 20% lower to the market, that might not be possible for some investors and some might want a bigger discount.
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