One thing is for sure, just because you find a foreclosure that is selling for half of what it did three years ago doesn't mean that it's a good deal. As a matter of fact, determining if a property is a good deal and acquiring it for a good deal are the most important aspects of investing.
Included in this exercise is estimating your repair cost, and maybe even harder, estimating what you are going to need to do to the house to get it in selling shape.
It is all too easy to take a home that is a marginal deal and convince yourself that it's a great deal and then spend too much money on the rehab because you did not anticipate repairs, or more commonly, you decide to make it your pet project and put in granite counter tops and a pool in a working class neighborhood.
I don't mean to beat this point into the ground, but again, the most common mistake I see among beginners is they put too much money in the wrong places when remodeling a home.
I blame it all on the “flip this” T.V. shows and also on our human nature which makes us want to do things that are creative and fun.
I don't discourage using your creativity. As a matter of fact, it is essential if you are going to flourish in this business, which I intend for you to do.
You just need to focus your creativity on producing a quality finished home that matches the neighborhood while staying within your budget.
Remember, it is very easy to keep throwing money at something and make it nice. It does not take a real estate investor to do that.
It does take more knowledge, principles that you are learning, to find a home that can be negotiated to a fair price, understand the standards of the neighborhood and market, remodel the home to meet those standards while staying in your budget and selling or renting the home quickly so that you maximize your return. This is true creativity.
You have to be much more creative to make $20k to $30k on a house in 90 days during today's market than to making a house look “great” by spending too much money on it and ending up owing or investing more than you can get in the market for the property.
Let's go through all the things you have to keep in mind and analyze when purchasing a home to rent and resell in today's market.
I use a spreadsheet that helps me get through all of this quickly and easily and maybe even more importantly, keep me from forgetting something and making a costly mistake.
However, we are going to act as if you don't have the spreadsheet for the rest of this post so we can go through all the specifics.
1. The first thing that we need to analyze is the local market that we are considering investing in. We do that by figuring out what market phase the market is currently experiencing.
2. Choose a proper exit strategy bases on the market and area
3. Now that we have our overall strategy in mind, we need to find a house that we can start negotiating on.
4. Then once we find a few that look promising on the surface, we must dig a little deeper to see what's really there. Here is my rule of thumb. If my gut tells me it's a good deal, I run through all the numbers to make sure my gut is right.
If my gut tells me that it is not a good deal, I don't bother with the numbers because I don't want to try to convince myself that I should buy a deal just because I can make the numbers work. If you try hard and long enough, you can manipulate the numbers and make any deal seem like a good deal. Don't do this. Stay objective. Always remember that there is another deal around the corner.