(1) Buy At a Discount.
You do not need to find a foreclosure to buy at a discount. You can find discounts on the MLS and from private and related parties. You can also buy properties in pre-foreclosure and acquire discounted bank-owned properties. You can determine the level of discount you demand- but there are discounts in the range of 10-35% and beyond- so never pay RETAIL- you don’t need to.
(2) Use Low Amounts of Leverage.
Leverage is killing America in 2008. The fact that our country relies on credit and that we as individuals and a country are over-leveraged has sent our economy into a tailspin. Everyone agrees- we need to deleverage. You should be putting at least 20%-25% down- and with new tighter financing programs in place- you are going to need to. You should. Buying a property with all cash might be prudent and debt levels on investment properties should be in the 50% LTV range to ensure that you do not negative cashflow. Negative cashflows can bleed you dry and force you to sell or foreclose at inopportune times.
(3) Good Neighborhoods.
Avoid sketchy neighborhoods. Be careful on betting that certain blue-collar neighborhoods are truly beginning to turn-around. Don’t get too far ahead of the “curve” as some neighborhood revitalization don’t materialize. You don’t have to buy properties in the very best neighborhoods- but don’t own properties in neighborhoods that you wouldn’t be proud of. Check the cars and how homes are maintained as well as the level of retail and schools nearby and you’ll know. Watch traffic patterns and don’t buy properties far away from city centers and/or public transportation.
(4) Low Fixup.
Avoid functional obsolescence such as torch down roofs, single pane windows, septic tanks, oil heat, galvanized plumbing, outdated electrical and big fixup projects. In this current housing crisis- there is no need to compound your challenges in light of the abundance of distressed properties. Keep your fixup to a minimum and do not over-remodel. Everyone is going back-to-the-basics and you may not get back $1 per $1 spent on remodel.
(5) Would It Make a Good Rental?
Do not buy a property that is either too small or too big to be a good rental. Along those same lines, do not buy a property that is too beat up or too nice to be a rental. Even if your initial plan is to flip- make sure the property doubles as a good rental just in case something goes wrong. That way, you can rent it quickly and begin to earn income and cover any monthly expenses. Three bedrooms are ideal in my opinion.
(6) Near or Below the Median Price.
A year ago, the median price in King County was $450k, today (in 2008) it is $415k. Make sure your properties are near or just below the median price. $399k has a nice ring to it. $299k has a nice ring to it. There is a big difference between $450k and $550k in this market. It is probably better to be near $300k-$400k. No matter how bad the economy falls- there is still a big level of demand at that price level in King County.
(7) Good Tenants Only.
Do not rush to rent out your property. Go in eyes wide open when you are dealing with various pets and the number of inhabitants as that translates directly to wear and tear on your property. Examine their credit and look into their rental and work history. Evictions and major fixup costs a lot of time, money and energy you don’t have to spare.
(8) Examine Your Cashflow.
Some properties just cashflow better than others. Pick an un-leveraged gross rent that you believe in and never buy a property that does not meet your criteria. If, for example, you demand an 8% un-leveraged yield in year one and your un-leveraged gross rent after tax deductions is $16,000- never pay more than $200,000 for that property.
(9) Sell on Your Terms.
If you follow these rules on cashflow, leverage, buying at a discount, and good neighborhoods- you will be able to sell on your terms. Do not sell at the bottom-when people are panicking. Sell at the top when skies are blue and the horizon seems infinite. The only reason why you lose your options to sell is typically that your leverage versus your asset value are out of proportion. If you follow 1-8 you should be able to sell on your terms- in your time. Just have the courage to sell when times are good- you don’t have to time the peak- just make sure you are able to reap the returns that are in line with your personal risk-return goals.
Incolo is a real estate blog about buying, selling, foreclosures, first-time home buyers, and all things real estate. Visit http://www.incolo.com for more great posts.
Harold_Hing
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Tags: Foreclosure