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Secrets of Making Money from Real Estate - Part 4
Analyzing and finding the right property deals:
Firstly read my other article on how to Buy the property at a discount, this will cover the basics on how to buy property at a lower than market value price. This is very important because It can completely change the aspects and financing the deal. It is also good to have more equity than just your deposit on the house because you have created instant wealth and because now you will have more equity compared to debt than what the bank had planned the loan for, enabling you to take out bigger and more loans faster. You will also be able to borrow money against your home to help you finance the property 100% if needed.
So aside from buying the rental property below market value you need to look at several other factors. Like the income from rent, interest rates and amount borrowed, expected growth, possible improvements, and other expenses.
Rent can be found from asking people who live in the area, real estate agents, and by property management companies.
Growth can be found from finding previous valuations of the property usually done by the government department in charge of housing, varies from country to country. If you can see how much the property increases by value from year to year you can usually get a good indication of what the capital gains percentage is.
Expenses will consist of insurance for the property, interest payments on the mortgage, any taxes you may have to pay, unexpected repairs such as a toilet breaking, property management fees, closing costs for when you purchase the property and maintenance fees such as electricity (can be passed on to tenant).
Renovation can be used to increase equity and weekly rent. Look here to for some good home improvement ideas. This is important because if you can increase weekly rent the figures will change.
Lets look at this example You find a motivated seller selling a three bedroom/two bathroom property. Because the seller is going overseas and needs the money quickly he is trying to sell it for a negotiable price over $140,000. You now get an independent evaluation which deems the property to be worth $155,000. You go and find out how much the value of the property has increased over the years. You also look into what new buildings such as malls are being built in the area which might increase the value of nearby properties. However You determine capital growth is a minimal 5%. You now find out what the median rent for a three bedroom/two bathroom property in the area of the property. You find out that its $220 per week. You now make an offer on the property for $125,000. The seller does not except. Three weeks later the seller is overseas and counter offers $130,000. Before accepting you go to several banks and find the best deal you can get is 80% financing with 6% interest. The mortgage will be for $104,000 with a down payment of $26,000. The yearly interest only payment will be $104,000*0.06 = $6240 You then establish your other costs such as insurance which is $500 per year, the property taxes which are $1,200 a per year, the cost a property manager $1,300 per year. You do your calculating to find out the cash flow of the property. The income will be $220 per week which is $11,440 per year. Your expenses which are $500 + $1,200 + $1,300 + $6,240 = $9240. $11,400 - $9240 = Positive cash flow per year of $2,200, excluding any possible tax advantages you may receive! The positive cash flow will be enough to cover any unexpected repairs, the fees of solicitors for the closing cost, and any vacancy costs. Realizing how good the figures are, you accept the sellers offer. You then paint and remodel the kitchen, a job worth $15,000. You get the property revaluated to see its now worth $170,000. You have increased your equity by $40,000. Because the property's value has increased you can now charge more rent to your tenants. The new rent is $265 per week. This will increase your positive yearly cash flow to $4,540!
The key now is...Don't get emotional:
I'm sure you noticed how every figure in the previous paragraph is in bold. This is because as long as the figures work out to make you money, EMOTIONS DON'T MATTER ONE BIT! Just because the property has a really nice garden, do not show you think that and be willing to pay extra for it. You aren't going to be living in the house so do not buy a house which you want to live up your living expectations. You will also loose your negotiating edge when getting emotional.
One of the worst times to show your emotions is if you are trying to buy the property at an auction. Auctions are designed to put pressure on the buyers. Never go above your limit because of a quick emotional decision, this could lead to huge financial disasters. Also, with auctions don't bid at all until you are very close to the "Third and final call".
Settling and contracts:
The two most important things when it comes to writing a contract or sales and purchase agreement are that you have someone with legal advise and experience in property help you write it (a solicitor), and that you always have a legal way out of a potentially bad deal.
If you are looking to put the property into an asset protection structure, a good idea is to write your contracts under "As nominee" instead of your real name. This will allow you to legally buy it and put it into the asset protection structure.
One of the best things about real estate is that the contracts you can enter can be very flexible if needed. Sales and purchase agreements can be drawn for such purposes as renovating or finding tenants. Say for example you could include clause saying that you have six months to work with the house before you pay the money, or one month to find a tenant before you pay for the house to prevent a loss in revenue.
Due diligence is a way for both parties, the buyer and seller, to get out of the deal. If you can word a due diligence period of a few days into the contract you would have a few days to review the property and if unsatisfied with what you purchased, get out of the deal.
Property manager or should you manage your own property?
Now is the time to decide if you would like to use a property manager. I always use one because I can not be bothered fixing a toilet or shower at three in the morning. Property managers will take care of almost everything for you so you have more time. Some will even find tenants for you. Property managers will usually charge a small commission percentage. Some people argue that you shouldn't pay someone to manage your asset. I disagree because If you spend most of your time repairing and looking after one rental property, you will not have time to find new property deals.
If you choose to manage your own property take these few points into consideration: Be sure to review rent every six months because rent prices will usually go up. Finding the right tenants will require some sifting skills on your behalf. Be sure the tenant is reliable, honest, and can make the rent payments. Check up on their previous renting history with other landlords if possible. Can you handle the tenants? If you have to evict a tenant do you know the exact process you must abide by in your area? Can you keep account of all rental payments? You need to file tax and have a good record of what you are earning from a property, especially if you want to be illegible for tax breaks. Your time is your most important asset, do you want become tied up in just one rental property?
This article was written by John Whiteside. The original article can be found here http://www.use-your-equity.com/realestateinvesting.html . Use-Your-Equity can show you how to create value in your home, then show you how to use the newly created equity to make money. http://www.use-your-equity.com for more information.
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