Step 3: What Is The Expected Value Of Your Desired Property
Before calling a real estate agent, you need to really dig through the properties and costs to understand where the market sits. As a real estate investor, you must value your property correctly. Most real estate agents mainly deal with people looking for a new home or vacation home, not real estate investors. Investors should be emotionally detached from the buying process and mainly interested in making money. I personally love using Zillow to get data about a particular market. The search criteria allow you to set a graphical area to search and various parameters such as price, # of bedrooms, etc. These searches will even send you an email when new listings pop up. The second feature is the ability to look at historical sales over the past 2 years. This allows you to start doing your own comparables(Comps). At this point, you should start looking at prices per neighborhood/location. For example, it is amazing how fast the price drops one street off of the beach. Another site that I regularly use is Redfin. I find that they have more accurate information on HOA dues and property details. In case you missed it, check out my previous Step 2:Finding a Location.
What is the difference between a home buyer and a real estate investor?
Many people have experienced being a home buyer: walking through an open house, wondering where to put the couch or your favorite picture. Forget all that :> you a looking for a property to make money on. This is equivalent to buy stock or some other commodity. Also, many people look for an investment property that they will one day retire to; this is a great way to lose your shirt. If your business is successful, you’re going to be renting this to 60 different sets of guests per year. They are going to break your things, possibly steal items, and treat your place like a hotel; see my future post on “Rental Horror Stories.” With that being said, we have excellent guests, even the one that broke the 55″ tv 🙂
So down to brass tacks (what does that even mean), you are looking to buy a deal. You should get about 1 out of every 10 offers. It would be best if you made low offers but sweetening the deal in other ways. For instance, can you offer a quick/cash close? How about offering $10,000 in earnest money proving you are serious? Also, make sure you are pre-approved. Financing your investment property is different than buying a home you live in; see my post on “Financing Your Investment Property.” This is also where you will need to work with your real estate agent who can also help you determine the property value. It is unfair to expect your real estate to generate 10s of offers for free. It would help if you compensated your agent for these offers. For more on real estate investing, see Bigger Pockets.
How much should I be willing to pay?
We are finally getting closer to buying your property. From Step 2: Finding a Location, you should have a good idea about the gross revenue of properties in that location. Again, it is important to find like properties on Mashvisor. For instance, a place on the beach generates more than a place off of the beach. But, the place on the beach costs more. The property value will help you figure out what your profits will be.
It is now time to figure up your costs. There are some typical costs to count mortgage, HOA fees, taxes, Airbnb fees, cleaning fees, utilities, rental insurance, operating costs, and repairs/maintenance for vacation rentals. The amount you pay directly affects the mortgage costs. Therefore, you should make sure that your monthly costs are below your monthly gross revenue. Sign up for my Newsletter and receive our guide for estimating costs.
While short-term rental income is typically 3x long-term rental income, don’t overpay for the property because you can still turn a profit. Remember, you make your money at the purchase of the property, not the sale. For example, you buy a property at 20% below market value. You instantly have 20% equity in that property. You could sell that property immediately for a profit. On the other hand, if you buy that property at 10% over market value because you can still make money renting it, you have a negative 10% equity. If you end up having to sell the property right away, you will take ~25% lost on it (10% negative equity plus ~15% on closing costs.) I know the market is hot right now, but there are still deals to be found. For a detailed discussion on borrowing money and leverage, see our post, “Leverage you two-faced friend!“
Property Value Summary
Now that you are thinking like a real estate investor. You should have found a couple of properties that seem to fit your criteria. The major reason for picking out these properties is to understand the area and what you can afford. The next step in getting started is finding a good real estate agent. See my next post, “Step 4: Find a good real estate agent and Property“.
Remember, if this sounds overly complicated, Relaxing Condos offers consulting services to get you started with any of your vacation rental business needs. If you found this useful, please share it on social media using the buttons below. Also, don’t forget to sign up for our monthly Newsletter, Special Hot Tips, and our cost estimating guide delivered to your inbox!