Just because the property has good numbers, does not mean it is a good buy
When the numbers on your potential real estate investment look good
After a weekend at the real estate investing course that I paid dearly to attend, I was newly equipped with the mission to find properties with a Gross Rent Multiplier of 7 or less. It took me some searching but I found one with a GRM of 3.47! What a great find, or so I thought.
The numbers:
* Asking price = $150,000
* Monthly rent = $3,600
* $150,000/($3,600 x 12) = 3.47.
What a pleasant surprise when the Vendor was also willing to hold a second position on the property. So, not only was I able to secure the low GRM property, but I was also able to get a vendor take back loan.
The trick was that this property was run down, had problem tenants, and always needed a lot of work. Do you remember the crack house story from a few months ago that put me in court and cost me nearly $25,000 in court ordered work and fines? If you do, then you know about my GRM property of 3.47. To be fair though, it is possible to do well with a property like this. To do so, however, you have to live close to it, have thick skin, and be available 24/7 to maintain it. Or, have a phenomenal property manager that does not cost you an arm and a leg!
When the numbers aren’t as good, but the property has a lot of potential
When you know what your goals are, you can easily identify properties that fit within your goals. We were looking for a property to purchase with potential appreciation, reasonable liquidity and limited hassle. With several other properties causing us grief, we really just wanted a good investment, even if we had to pay more for it relative to the rent we were bringing in.
The numbers:
* Asking price = $275,000
* Monthly rent = $1,575
* $275,000/($1,575 x 12) = 14.55.
The property had a GRM that was over double what the real estate investing course recommended we purchase, however it fit all of our other criteria, and because we used equity from another property to purchase it, we didn’t need any of our own money for the down payment. In the end, it costs us $200/month to keep it, but we have some tax write offs to offset that, and it has been a very low maintenance and stress free purchase so far. It’s also the one that Julie still has yet to see!
Knowing your goals gives you comfort and confidence in your purchases. Also, knowing what you are willing and able to endure financially and emotionally will take you a long way to finding properties that fit into your life.
published July 16, 2006
