One of the most important things I believe every investor should always do before ever making an offer to purchase any property is to first think about what the highest and best use for that property will be. Every day I talk to newer investors who never stop to think about the best use of the properties they look at and how this simple exercise can, and will, greatly improve their profit from every deal they do. It took me years to understand the importance of first considering what I should do with each property I was looking at before even thinking about making the offer to purchase it. This may not seem to be of much importance to those who aren’t experienced investors but one thing is for sure, if you don’t understand how to best utilize the property it will greatly affect the amount of money you make at the end of the day. It is my opinion that you should always step back and take a deep breath before making an offer to purchase a property. Determine exactly what your plans are if you are successful buying the property, while also analyzing the numbers of that property before making your offer to purchase.
This idea is important, simply because when you know the optimum use of the property, figuring the income and holding costs will be more in-depth, and therefore will always increase the amount of revenue you make from those deals. Here is an example: Some properties are best suited to be rental properties because of area, age and condition. Other properties are better suited to be rehabbed and sold as retail priced properties, again because of area, age, and condition of that property. I see far too many inexperienced investors who believe that a home best suited as an income property can be flipped and sold at retail price. At the same time, they believe that they can take a property with the highest and best use of a retail property and purchase it, thinking that property would make a great rental unit. Most newbie investors have a one-track mind and are focused on fix and flip investments, which isn’t the best way to make more money from each deal they do.
Another point of discussion should always be the cost of materials used for each type of property you are looking at. The materials used for each of the different types of property will always be varied. In most rental properties, the materials used will be lower quality since it is usually being put into a lower priced and higher-turnover property. On the other hand, in a rehab project, the investor will usually choose higher-quality finishes and materials. The buy and hold investor is looking for materials that will keep up with his tenants, not necessarily the most expensive, while the rehabber wants a higher return on his investment in materials.
Most seasoned investors who are more diverse in their real estate investing business buy different types of single or small multi-family properties. They understand to never use the same materials to rehab a rental property as they would in houses they plan to renovate and sell at the highest retail price they can get. My reason for wanting investors to understand this crucial concept is if each one took just a moment to determine the best function for their investment, then they would realize that the numbers for that property would calculate quite differently than what they originally thought. The numbers of a potential income property will differ depending on if the investor is getting institutional financing or if they are getting seller-financing terms. These financing factors also come into play when buying a property that will be rehabbed and sold for a profit.
May I suggest before ever making an offer to purchase a property, to always take a minute to first determine what your plans are for the highest-value use of that property. This will determine what formula you will execute to know what you should pay for each property before making your next offer to purchase.
Until next month, check out my new website for any information you need to become a successful investor, and be sure to listen to my weekly podcasts found on Facebook and on iTunes under “The Real Deal Podcast With Larry Harbolt”.