Step 4: How to Make an Offer on an Investment Property
Welcome back, you’ve made it to the fourth stage in this six step checklist series for new real estate investors. Leading up to this step, you have: (1) defined your investment strategy, (2) secured financing and (3) evaluated rental markets and searched investment properties—now it’s time to make the offer.
At this point, you and your real estate agent have explored the market, evaluating potential rental properties and you’ve identified the one you’d like to submit an offer on. Much like the traditional home buying process, you and your agent will put together the offer that your agent will submit to the seller’s agent. The seller and their agent will then review the offer and negotiations will begin.
A key takeaway at this point in the buying process is don’t be afraid to walk away. The worst thing you can do is force a deal if the numbers don’t make sense. For new real estate investors, this can be especially difficult as it’s easy to let emotion affect the decision. However, it’s imperative that you remember this rental property is an asset. While this is sometimes easier said than done, it’s extremely important that you keep emotion at bay and rather, focus on securing a profitable deal.
Wondering if you can actually afford the rental property? A few rules to keep in mind:
- Buy below market value—10-20% lower is a common industry standard
- Ask yourself, what’s the anticipated ROI (Return on Investment) for the investment property? Most seasoned investors don’t accept lower than a 10% cash on cash return
- Buy in an affordable neighborhood with a decent ratio of renters to homebuyers
- Understand that monthly rent should be AT LEAST 1% of the purchase price
- Perform thorough due diligence before agreeing to purchase. (We cover due diligence in more detail in the next installment of this series)
- Ensure you have sufficient cash reserves to cover 3-6 months of expenses in the event of unexpected maintenance or vacancy
If the property doesn’t meet these criteria, it’s probably not the best deal to pursue. During negotiations, you will want to use all the information you have about the property to negotiate price, closing date, concessions, etc. Before signing off and getting to what’s commonly known as “mutual acceptance,” be sure to conduct your due diligence. Click here for the fifth article in this series - What to Look for When Conducting Due Diligence.