And what about the appreciation in values rescuing the deal? The current trend of 7-15% per year appreciation is unusual and expected to level out to a more normal 3-5% this year. But even if it doesn't, remember that 7% appreciation will be eaten up by commissions and sales costs of you sell 12 months from now. Let's see what happens if you, like most smart investors, pay no more than 80% of value for your property.

    Property value       $90,000 
    Purchase price       $72,000 
    Down payment         $14,400 
    Closing costs        $2,500 Cash 
    investment           $16,900 
    Mortgage balance     $57,600

    Rent                 $10,800/yr
    Mortgage payment     -$4,453.44/yr ($371.12x12)
    Taxes & insurance    -$1633.20/year
    Turnover costs       -$1500
    Vacancy loss         -$300
    Utilities            -$100
    Advertising          -$200
    Replacement reserves -$1,340
                         ________
                         $1,273.36 positive cash flow


AND, by purchasing the property below market, you control $18,000 in real equity the day you buy. AND, by purchasing the 
property below market, your out-of-pocket costs for down payment and closing costs are reduced from $20,500 to $16,900, 
increasing your return enormously.

By the way, the same cash flow can be achieved by paying full retail price, but letting the owner carry the financing on 
the $72,000 balance at 4.75% interest for 30 years.

And if you're wondering where these sellers are who accept an offer of 80% of value to sell their home, or who are 
willing to carry terms, the answer is that they're all around you-you just don't know where to look yet. Even in super-
hot markets, where everything seems to sell at full value, there are sellers who have properties that need they're 
willing to sell cheap-or on terms-in return for a quick, easy sale. The sellers may be motivated by a job transfer, a 
divorce, a pending foreclosure, a property they've inherited, when they live in another part of the country, a need for 
quick cash, a property that they've let run down to the point where a retail buyer isn't interested in purchasing it, or 
any of a dozen other reasons. Simply put, these sellers don't have the time, inclination, money, or energy to expose 
their property to the retail market and wait for it to sell. One of the very first skills you'll need to learn to be a 
successful investor is how and where to find these sellers.

But we haven't yet run out of reasons for you to buy all of your properties-whatever your exit strategy-at below-market 
prices. Here are a few more:


• Buying under market means that you can liquidate quickly, if necessary. Each and every week, I talk to landlords who 
desperately want to sell their rentals. Sometimes the reasons are personal (job transfer, can't handle the tenants, 
divorce, increase in hours spent at work), and sometimes they're financial (property is losing money, lost job, facing 
foreclosure). When these landlords have purchased their properties at retail in the last 2-3 years, they usually end up 
walking away from all or part of the original down payment they paid. The home that they bought 2 years ago for $90,000 
is now worth about $99,000-assuming it's in as good a condition as when they purchased it, which is unusual when tenants 
have been at it-and the costs of selling it retail (6% commission, transfer taxes, closing costs, and fees paid on 
behalf of the buyer) bring the landlords net selling price down to less than the $90,000 they paid in the first place. 
And if the buyer is a seasoned investor, the purchase price will be no more than $80,000 cash. Even taking the real 
estate agent out of the equation, the seller will lose money on the sale-something that they are often willing to do, if 
the problems with the property or in their lives are pressing enough.

On the other hand, the seller who paid just 80% of value to begin with will walk away with at least some profit, even if 
he has to sell soon after the purchase. Everyone plans to keep their rentals forever, but sometimes life gets in the 
way. If the worst happens, would you rather take a loss, or make a profit when you sell?


• Buying under market bullet-proofs your investment, whatever happens in the economy. One of the fears in the minds of 
former stock market investors is that a "real estate bubble", similar to the stock market bubble to recent years, will 
eventually burst, driving property values down. In most of the United States, this is an irrational fear-yes, there will 
be a decrease in the level of appreciation, but no, real estate will not lose value-it is not unheard of in some markets 
at some times. In some markets on the east and west coasts, real estate is clearly cyclical in nature-California, New 
York, etc-and in some markets, local economic factors can drive property values down, as in Houston during the crash of 
the oil market.

But think of it this way: if you've purchased your property at a below-market price to begin with, a drop in values will 
simply bring the value of other properties in line with what you paid to begin with. You'll lose net worth on paper, but 
you won't lose money even if you sell. Or if you do, it will be significantly less than those around you who paid full 
retail for their units.

Perhaps more importantly, by buying under market, you'll have more flexibility to ride out economically troubled times 
than other, less savvy investors. Imagine that America enters another depression, with 30% of all adults out of work. 
Will people still need a place to live? You bet. Will they be able to pay as much rent as before? Probably not. Since 
you bought right in the first place, you will be able to afford to lower your payments, thus attracting tenants even 
when noone else can.


• All things being equal, buying under market will make you richer, quicker. Remember our example of the $90,000 
property. Let's say that you go on a buying spree and purchase 10 such properties this year. Look at the difference in 
your net worth and cash flow if the property values, rents, and expenses each increase at 5% per year:


                          At Retail           At 80% of Retail
Property Value            $900,000            $900,000
Purchase price            $900,000            $720,000
Cash out of Pocket        $200,500            $169,000
Mortgage Balances         $720,000            $576,000
Net Equity Controlled     $180,000            $324,000
Net Cash flow             $1,600/year         $12,734/year
Return on cash invested   .8%                 7.5%


After 5 years
Property Value $1,093,953 $1,093,953
Mortgage balances $645,890 $516,713

Equity Controlled $448,066 $577,243
Net cash flow $1945/year $15,478/year
Return on cash invested .97% 9.2%


At the end of the loan term-that is, after 25 years, the two strategies equalize in that you control 100% of the equity 
in both cases. But in the meantime, your net wealth, return, and income are significantly higher when you pay less to 
begin with. And more wealth and income mean more opportunity to leverage those assets into even more below market deals.

 

Do you own real estate articles or stories and want to share with other investors? 
You have chance to win $100 Amazon Gift Certificates. We will give away 3 prizes for top authors each month!

Email your articles or stories to:  articles@buyincomeproperties.com

 

© Copyright 2001 - 2010 by BuyIncomeProperties.com               

 

 

Visit Real Estate Forums for every real estate investing topics!  Enter Here

    

Top of Page