After you've committed to purchase investment real estate, you absolutely must understand how to analyze deals, so you know what makes a good deal. This is the only way to feel fully confident in your purchase.
Next, get spouse / partner on board and obtain necessary financing / Pre-Approval.
Finally, set buying criteria.
The worst decision is no decision, the best decision is one you can justify.
Making offers on Investment Real Estate is a little different than the typical owner occupant transaction. We are looking for property that meets your buying criteria and not too concerned with what the property looks like or how it makes you feel. Once a property meets the criteria, we go ahead and make the offer. Once accepted by the seller, we have mutual acceptance and we begin the Due Diligence Process.
Due Diligence includes satisfying our standard contingencies including Property Inspection, Lease Review and Financing. This is when we view the interior of property, hire a property inspector to check major systems; Review all leases, rent roll, and Profit and Loss statements to confirm the information originally presented by Seller and their broker. If anything comes back less than what we expected, we use this to negotiate or back out of the deal. Once we come to terms after any needed negotiates, we are in Full Mutual.
The last step is the bank appraisal, assuming this comes in at value, we move to close.
The 3 M's are Mortgage, Management + Maintenance. These are the 3 largest expenses a real estate investor can expect to pay.
The mortgage expense is determined when you buy. The purchase price, down payment, interest rate and loan terms dictate the actual monthly amount; By the time you own the property, there is not much you can do about the mortgage payment other than refinance.
Property Management is the first line item to be eliminated by “mom + pop” real estate investors. Depending on portfolio size and location, management can cost between 5% to 10% of gross income. Many owners feel self-managing reduce expenses, therefore increases the value of their property. However, these efforts often go unrecognized as buyers generally include property management cost in their acquisition analysis.
One time and recurring maintenance costs are the expense line savvy owners and managers alike focus their efforts, and rightly so! This is the line item that we have the most control over and can make or break any real estate investment.
Most self managing owners are over spending on maintenance and repairs because they are charged a higher amount by vendors. Vendors charge less for regular, reliable work; Small portfolio owners struggle to keep vendors working regularly, so they end up paying a bit more. In addition to this, many self-managing owners slack on regular maintenance and inspection items, which result in higher maintenance costs down the road. Depending on property size, type and location, property maintenance can cost up to 30% of gross income!
Sagareus Real Estate
When I established Sagareus Management Service, I had an idea-- if we can reduce maintenance costs enough to completely offset the management cost, we will create a win-win scenario for our Investor-Clients. This will in turn allow our clients to focus their investing efforts on securing better and/or more financing.
In other words, IF we create and operate a Maintenance system so well that our clients realize the investment returns their Advisor originally sold them, THEN our clients will have more resources available to acquire more rentals. Our clients grow their portfolios, our team increases sales and assets under management. Everyone wins!