Why would you buy investment property without seeing it? It’s a numbers game. Whether or not you see the property before you make an offer isn’t nearly as important as making sure the numbers make sense.
A man in California used to just send out offers on a hundred MLS listings at a time, offering 25% less than the asking price on each one. Occasionally a few sellers would accept his offers. He never had to look at the homes beforehand. Including an “inspection and approval” clause in the offer meant he could always back out of the deal later when he saw the house. Meanwhile, he efficiently found the truly motivated sellers.
This story demonstrates that with a good clause or two in the contract, you don’t have to worry about making an offer before you see a property. It’s true when you buy investment property or your next home. When it isn’t everything the seller says it is, you can reject the deal with little or no loss. So, why wouldn’t you want to look at the property?
The main reason you might skip looking at a property before making an offer is time. In today’s market, timing is everything. Delay can mean losing a great deal. This is certainly even more true if the property is far away. If you don’t get a price that makes sense, why spend your time traveling to look at real estate investments? A price and terms that make sense – this is what is important. Of course, I would NEVER suggest buying a property without seeing it first and only after having conducted a thorough inspection, but finding a property where the numbers work is how you invest.
Investors value income property according to current cash flow (or should if they want safe and viable investments), so start by verifying income. Get the actual profit and loss statements for the past 12 months, called the “rolling 12.” Also get a current rent roll. Always consider the potential income if rents are raised, units upgraded, vending machines are added, etc., but base your offer on the current income.
Verify all expenses with other investment properties in that area. If any expenses listed by the seller seem unusually low, they most likely are. Just substitute your own best guess in place of any suspicious numbers.
After you determine the net operating income, apply the appropriate market capitalization rate to arrive at the value. If you’re not sure how to do this, get help. Talking to local commercial brokers will likely be your best source of current market caps in your area. However, you really should understand the principle of how to figure a cap rate. This is a numbers game you’re playing.
Calculate loan payments. Talk to your banker or use a reliable online calculator. See how much cash flow you’ll have. Then you can figure your cash-on-cash return based on how much of your own money you put into the deal. Just divide the cash flow by your investment.
When the numbers work, you can safely make an offer. Always offer at least 20-30% below market. Submit a Letter of Intent (LOI) with your offer and with the proper contingencies and see what happens. The idea here is to start generating a steady flow of potential deals. Eventually, that “diamond in the rough” will emerge.
Inspections will tell you if there are further problems that will affect your numbers or cash flow. I recommend you be there for the inspection, right along side the inspector, looking at each and every unit. You can always renegotiate if there are problems or issues (assuming you made your approval of all inspections a contingency of the offer).
Bill Manassero is the founder/top dog at “The Old Dawg’s REI Network,” a blog, newsletter and podcast for seniors and retirees that teaches the art of real estate investing. His personal real estate investing goal, which will be chronicled at olddawgsreinetwork.com, is to own/control 1,000 units/doors in the next 6 years. Prior to that, Bill and his family lived in Haiti for 11 years as missionaries serving orphaned, abandoned and at risk children.