What price should you offer on investment property?
Some of my clients are trying to fool themselves into overpaying.
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
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.
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 email@example.com twitter.com/ProfBruce profbruce.tumblr.com/archive brucemfirestone.com
MAKING IMPOSSIBLE POSSIBLE
postscript: never go into a negotiation without first developing your BATNA, your best alternative to a negotiated agreement…
In real estate, you often use comps (comparables) as your fallback position/your BATNA.
You are 100% within your rights not to overpay based on the future work you are going to do.
BATNA = comps because this is what else you could buy if your deal falls through.
But be friendly too—romance a seller ? sometimes even writing a nice explanatory letter to accompany your offer [handwritten is fine!] works wonders.
A young developer couple I know won the right to renovate and renew a downtown women’s shelter that was up for sale (because it was past the point where the organization could take on extensive and costly updating and renos, including needed structural work–the building was slowly collapsing in on itself) despite the fact that theirs was the 3rd highest offer.
The BOD (board of directors) accepted it because they liked the handwritten and passionate letter written by one of the spouses–she’s a mega talented designer who talked (in her letter) about how they would beautifully re-purpose the building (instead of tearing it down) to house six families in what is an excellent neighborhood, is, close to employment and services.
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