Every day, we talk with many people looking to buy investment properties. The most frequent question we get is about how to evaluate a real estate investment property deal in Baton Rouge. There are a lot of pros in our market who can answer that, but there also are a lot of people still learning, who are a little overwhelmed by all of the moving parts in an investment deal. If you want to learn how to evaluate a real estate investment deal in Baton Rouge, you are in the right place.
Since our entire business is finding great deals and passing those deals onto real estate investors like you at huge discounts, I thought it would be a great idea to share with you some resources on how to effectively evaluate a real estate investment deal in Baton Rouge. This is the foundation to deal analysis and works in any market… Baton Rouge, surrounding areas, LA, any other states across the country.
When you really boil it down, evaluating a real estate deal is simple. It is critical that you buy it right (i.e. – not overpaying), and to do that, you need to know and trust your numbers, not your emotions.
Lets dive in.
How To Evaluate A Real Estate Deal – (for single family houses)
There are just a few main elements when you’re evaluating a deal.
- Cost of repairs needed to get it back up to good condition
- The after repair market value (ARV) of the property (what it’s worth and can sell for today once it’s fixed up)
- If you’re going to buy and hold for a rental, you need to know what the rents are ON THAT STREET, and your expenses plus “debt service” (mortgage payment). Knowing this is essential to make sure the property cash-flows each month.
There are other things you can (and should) look at too, but those three are the main broad things to look.
Cost of Repairs
One of the things you should do when you are looking at a property is find out how much it costs to make it look like new. In other words, the cost of repairs. This could be a new roof if it needs it, carpet, paint, a new kitchen, yard, HVAC system, and often more.
To find a good estimate of cost of repairs, the best advice we have is to get to know a contractor or two (or ten) in your area and have them walk through the properties with you the first few times. Then, have them quote the repair costs, and build that into your offer. We help with that, by using our experience to estimate these costs for you, but depending on the level of finish and the contractors you use, the prices can vary thousands of dollars from quote to quote.
After Repair Market Value
This is simple, but many investors get stuck on this part. This is essentially what you could sell the property for today if it was fully renovated. This is found by finding out what other similar houses in the same area have recently sold for. NOTE: Don’t look at the “Listing” price… look at what houses similar to yours have actually sold for in the past 3 months. This helps you determine how much you could sell that house for if you had to… right now. You never want to over pay to a point where you can’t sell it for a profit in the next 3 months.
How do you find this? There are services out there that can help you with this, but often the best way to find out the true value of a house is to talk to a Realtor, or an appraiser. Heck, if you don’t know one, call a few today, tell them you have a property that you’re potentially going to sell in the near future, and ask them what they think it should sell for. The best way, however, is by spending time looking at houses that just got listed. Look at the price per square foot. Look at the level of finish, do they have granite counter tops, stainless appliances, tile showers? Or is it laminate counters, fake wood floors, and a Home Depot shower/tub combo? You should be able to get a feel for the market pretty quickly.
Buy And Hold For Rental
Our last topic is buy and holds for rentals. This is one of my favorite strategies, and you need to look at different things than when flipping. You don’t need to worry about what it’ll sell for right away. What you need to know is if your property will cash flow every month. That is pretty simple, because if you lose money every month, even if it is just a little, you cannot buy more, and if something unexpected happens, you could lose your house.
Find a good mortgage broker or private lender, and ask them what your mortgage payments would look like. Or, you could use online resources like mortgagecalculator.org. You still might need to talk to a lender to figure out what rate you would qualify for, however.
Then, you work backwards. Figure out the monthly cash flow you want, say $200 per month. Then, take your monthly rent, and subtract out all of the expenses like property taxes, utilities, property management fees, reserves for vacancy and capital expenditures (usually around 7% of rent each, but it varies based on the age of the property and location). That will give you the amount that you can spend on your mortgage payment. Plug that in to the mortgage calculator, and you have your offer price!
So, your offer price here should be:
Monthly Rents – Expenses – Monthly Cash Flow = Monthly mortgage
Simple enough right?
The cool thing is, the more cash you bring into the deal, the lower your mortgage payment will be. The bad thing is this makes your cash on cash return lower, but that is a topic for another day. If you want more information on how to evaluate a real estate investment deal in Baton Rouge, click the link. It is more detailed and specifically about rentals from one of the best free real estate education websites around.
Making An Offer
We’ve been talking about how to look at the numbers and analyze a real estate deal.
From there, just make an offer. Many times the properties we let you know about will already be so deeply discounted that we get multiple offers, often above our asking price.
If you really want a property, find out what is the max you could pay for the property and still make your numbers work, and offer that. Otherwise you may lose the deal because someone else is likely making an offer too. Always make sure you offer because the numbers work, not because you like how the property looks or you just really want to buy something. I will try to make sure my clients make money on every deal, but I could overlook something too.
With that said, the golden rule in real estate is to never over pay for a property. That’s why our own deal analyzing criteria is so darn strict, and why our buyers (like you) get such great deals.
I hope this little tutorial has helped you sharpen up your real estate deal analyzing skills, and we look forward to working with you soon.
If you have any questions at all, don’t hesitate to contact us anytime for anything.