Thursday, July 20, 2006
Is $10,000 Better Than None?
I have been pondering something for a while now. Usually when I evaluate a property, I use a strict set of criteria. I won't go into detail about every little thing, but one of the yardsticks I use is how much net profit the property will yield if I buy using conventional financing, hold for 3 months, and sell using a RE agent at $5k below market. Suffice it to say that this does not represent all my acquisition/disposition methods, but usually it's the worse as far as monetary return. In the past, I have always said that I wouldn't even think about buying a property this way unless it gives me at least $15k net profit in the end. However, I'm beginning to wonder if th is is really prudent. I'm looking at a property now that I could potentially make $10k net profit on (using this particular buy/hold/sell strategy). The annualized ROI would be 30%, so it's not bad by any means. I just worry a little, because $10k isn't a whole lot of wiggle room in case the unimaginable happens. Something could happen, and the $10k could easily be wiped out. But maybe that's just that little voice in my head making excuses. I wonder "what if I have been passing on likeable deals where I could be making $10k every three months?" $40k/year would be a nice cushion for future deals, marketing, etc.
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3 comments:
Can you explain this yardstick more? Are you assuming that you do no rehab and that you collect no rent?
If so, still coming out with $10K is not bad.
OTOH if you are spending your time and $ doing rehab it might be too thin. You have to balance your criteria so that:
* you can find and do deals
and
* the deals are not too thin
10 grand is still a decent profit. The real thing to watch out for if you go this route is your holding costs. As long as you are confident in your selling timetable, I would go for it. Selling $5 below market should help move the property.
Thanks both.
Basically, this particular method involves the following:
1. Buy well below retail (of course).
2. Have VERY little repairs. I'm talking nothing more than a paint job, carpet shampoo (or replacement), and cleaning.
3. Property fits the preferred characteristics of a working-class targeted audience. Most of all, it's relatively new.
4. Sell $5k (minimum) BELOW market value in order to sell quicker. This usually equates to a 3-5% drop.
Currently, with my limited free time, I am finding HUD and bank foreclosures fit this mold the most. Competition is tough (very tough), but I've seen some go by with only a single bid. I've actually had two in recent weeks where the winning bid was <$5k from mine, so it's only a matter of time.
The problem will be keeping the pipeline active. Once I get a house, it may take 45-60 days before I close and another 2-3 months to sell. That can equate to almost half a year on one house. In order to get the wheel churning faster at the beginning, I may have to opt for hard or private money to fund some of the deals, which would mean an overhaul of my figures.
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