I’m here with my Ronnie Adams. How’s it going
on man? Ronnie: Pretty good, pretty good.
Vance: All right, today’s topic is going to be giving you a basic investment property
purchase checklist. Something that you can use to go out and get your first property;
you can go through these steps and make sure you follow these steps and you’ll probably
have a successful purchase. Starting off we’re going to talk about…first
thing you want to do is make a decision as to how you want to use your property. You’re
going to flip it or are you going to rent it, what are you going to do with it?
Ronnie: The first thing that you want to do when you’re thinking about buying a property
is, do I want to flip it or do I want to hold it? Holding it meaning do I want it to be
a rental property. There’s going to be a couple things that you look at that you say, “Okay,
if I’m going to flip it, I need to be in an area that I know I could flip the house; it’s
going to be a quick sale.” If I’m going to rent it, I want to make sure that I can…I
figure out what my rent is going to be so I have to find a house that’s going to support
that particular rent. Vance: So that you could pay the mortgage
and make the profit that you wanted to make. Ronnie: Exactly. If you buy a house in an
area that is a flip area per se, then the rents are going to be real, real high. If
you’re going to buy a property in a rental area that you think that you’re going to flip
the property, well you might not be able to flip it because it’s not much…it’s not as
desirable. It’s not saying that rentals aren’t desirable but I have to look at, “Okay, can
I fix up, or purchase, fix up and sell this property in a six month period.” In a rental
area I might not be able to do a six month period. If I can’t do that six month period,
I’m paying taxes, I’m paying mortgage payments and that’s starting to eat into my overall
profits. Vance: Money out of your pocket.
Ronnie: Yes, so you have to make sure that you pick the right one.
Vance: All right what about the next step. Maybe choosing…determining if the rehab
expenses are too high. Ronnie: Yes, if I’m going to walk into a property
and let’s say that I already said, “Okay, I know it’s going to be a rental or I know
it’s going to be a flip,” I already know that now so now I’m going out and looking at the
property. I walk into the house and I see that it has an oil tank. For me, an oil tank,
as soon as I see that, I’m going to walk away. Vance: Where do you see that, where is that?
It’s under… Ronnie: A lot of oil tanks from older properties
they are under the ground so that you have to take them out because the new E.P.A. rules
are that you got to be on top of the ground. Vance: Got you.
Ronnie: The only thing is you don’t know whether that oil tank leaked or not. If it did leak,
then you’d have to pay the cost to clean it up.
Vance: And that’s extensive. Ronnie: That could be an extensive cost. Generally,
if I see an oil tank I don’t mess with the house. If I walk into the basement and I see
that there’s a crack in the foundation which I’ve seen before, can that be repaired? Yes,
it can but it’s going to be an extensive cost. I’m not looking to put out tens of thousands
of dollars on that one repair when I got to do the whole house.
Vance: Got you. Ronnie: If I happen to walk into a house and
see that the roof leaked but it was an extensive leak. So when you’re looking at the second
floor, I’m on the second floor where the leak came down or the water came down, now they
messed up the floor. If it messed up the floor, you might have messed up the floor joints.
Now It could get into some structural damage there. I may pass on that particular house
too because there’s a lot of houses out; I don’t have to take that one.
Vance: Got you. On your checklist you’re saying at that point, are the repairs necessary for
this property too extensive because it makes me back off from it all.
Ronnie: Yes, yes, yes. At some point you would have to say this thing could get out of hand.
Vance: Okay. Ronnie: And once you get in you can’t get
out. Vance: All right. That ties us to the next
one we have on the list here, talking about are the rehab costs in line with what our
plan is for the property in the end. Ronnie: Exactly. If you’re looking to flip
a property then you already know what that house should be worth at the end. Once I purchase
it for X amount of dollars and once I fix it up for X amount of dollars then I know
I can sell it. I’m this at the top that I can sell it for. Now that top amount that
I can sell for I would have to estimate that I may be 10, 20% or maybe a little bit lower
because I want to get a quick flip. You would want to make sure that your rehab costs don’t
go past what you could actually sell that property for to make that profit that you
were looking to make. Even with the rental, if it’s going to be a rental then I already
know that my rent cannot be more than a thousand dollars a month let’s just say. I purchase
a property for x amount of dollars. I’m going to rehab the property for another x amount
of dollars or whatever that may be. Then I have to get a mortgage. Once I get that mortgage
and my rehab costs were higher, that’s going to make my mortgage higher which in turn is
going to make my payment higher. Vance: Right.
Ronnie: If I put too much into the house, then my payment’s going to be too high. I
can only rent for this much. My payment’s going to be right here, so I want to make
sure that I can keep all that in line. All that is planning before I actually purchase
the property. They’re not blind; you can’t just walk in and buy a property and hope for
the best because you’re going to get bitten. Vance: And that’s why we have the checklist
here to help us through that process. Ronnie: Exactly, and the only reason that
we have the checklist here is because I got bit, so you don’t have to.
Vance: Last one we have here on this checklist is making sure that you can get out of that
property if you need to. What does that mean? Ronnie: I always say that you have to have
a way out. If I’m going to buy a, and this is more or less for rental properties, if
I’m going to buy a rental property then I need to know that I can sell it at some point
if I don’t want to do this anymore. Sometimes good, good rentals are in bad, bad areas.
I don’t want to buy a property…I always say that if you want to rent something, you
need to go in with the mindset that, “I’m going to be there for 30 years.” I might not
be able to sell it or I would have to find someone else just like me to take it off my
hands. How about if I can’t? So If I have the mindset that I’m going to be in here for
a while, then I’m not disappointed when I can’t sell it. You always want to have an
exit strategy. I might not buy in that area because I might not be able to sell it. This
area here, I probably could sell it but you know…
Vance: Still might be a little dicey. Ronnie: It might be a little bit dicey but
I still might take the chance. You have to have that time period. You’re not going to
want to do it forever. You want to be able to get out. If you buy in a real bad area,
let’s just say, properties always appreciate in value I may not be able to sell it in three
or four years but 10, 15 I probably could sell it because it’s going to increase in
value. My payment would be lower or I may have paid the house down some so I could always
get out at that point. You always want to have some sort of exit strategy at some point.
I’m not going to do this forever. Vance: All right. There’s a quick, basic investment
property purchase checklist you can use. You can find other checklists, podcasts, posts,
all kinds of great information at our website www.realestateguidetosuccess.com. Thanks Ron.
Ronnie: All right.