Before or After?

By Bruce Firestone | Uncategorized

Oct 13

What price should you offer on investment property?

Some of my clients are trying to fool themselves into overpaying. 

#BadIdea

You make money in real estate when you buy not when you sell, so buy smart.

Here’s how it should work:

A client of mine does a spreadsheet before he firms up his offer. It shows a decent cap rate (capitalization rate), which is good.

But the question is: was that before or after he did any animations (what we call boosting revenue streams)?

Because if it’s after, he should get the benefit
of that not the seller.

What I mean is this:

-say a seller is asking $500,000 for his property

-assume “normal’ rents would produce a NOI (net operating
income) of $25,000 pa

-therefore, its cap rate is $25,000/$500,000 = 5%,
which is below our minimum threshold of 6% (that’s what we target in the Ottawa area as our goal)

SO HE SHOULD OFFER $25,000/.06 = $416,667 NOT
$500,000

Again, you make money in real estate when you buy not when
you sell so be careful what you pay for any investment property… don’t get carried away/stay disciplined. 

Now lots of folks fool themselves. 

They’ll say, “Well if
I add a coach house or a basement apartment or a tech package or a maker
space/workshop or storage shed or games area or find some other way to raise rents, I can get cap rates up to
6% or even more.”

But here’s the thing, why should you pay the seller
for the future work you are going to do to improve his/her property? That extra
value belongs to you and only to you.

Comprehendo?

Bruce M Firestone, B Eng (civil), M Eng-Sci, PhD, Ottawa Senators founder, Real Estate Investment and Business coach, Century 21 Explorer Realty Inc broker,  1-613-762-8884 bruce.firestone@century21.ca twitter.com/ProfBruce profbruce.tumblr.com/archive brucemfirestone.com

MAKING IMPOSSIBLE POSSIBLE

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