A key part of my rental property investing strategy is getting a great deal on the rental properties I buy. It is not easy to buy rental properties below market value, but it is very important for many reasons. Getting a great deal on a house lets you build net worth, increase cash flow and allows you to sell a house if you ever get into trouble. I talk a lot about how to buy properties below market value, but how do you determine if you are getting a great deal on a rental property?
For more information on my rental properties and my investing strategies check out my complete guide to purchasing long-term rental properties.
How do you determine market value on rental properties?
The first step in determining if you are getting a great deal on a rental property is figuring out what the market value is. I wrote a very detailed article on how to determine what market value is here. Once you figure out market value, you need to determine how much less than market value you want to buy a home for. Buying a home $1 less than market value does not excite me very much.
How much less than market value is a great deal on a rental property?
When I buy rental properties, I want to buy homes at least 20% below market value. The reason I buy homes so much below market value is I want great cash flow, and the cheaper I can buy a home the more cash flow I will get. Buying homes below market value also lets me refinance easier and builds my equity. The more equity I have, the more money banks will loan me so I can keep buying rentals. My plan to purchase 100 rental properties.
I don’t think someone has to buy a rental property 20 percent below market value for it to be a great deal. You have to decide for yourself how much of a deal you need. The more below market value you want to buy a home, the harder it will be to find rental properties. If you insist on only buying properties 50 percent below market, you may never find a property.
For more detailed information on how to buy properties below market value, check out my book How to Buy Real Estate Below Market Value, which is available as an 116 page E book on Amazon or as a PDF here.
How do repairs needed affect buying rental properties below market value?
I have had a few people ask me “what good is it to buy a property $20,000 below repaired market value if a home needs $20,000 in work?” It does you no good, because you are not really buying the home below market value. In fact it is worse to buy a home that needs repairs and only discount the repair amount from repaired market value than buying a home at market value. A home’s market value will vary depending on its condition. If a home needs $20,000 in repairs, it’s true market value is not what it would sell for repaired. When you buy a home that needs repairs, there are going to be carrying costs while the repairs are made and more risk because it is impossible to know exactly what will need to be repaired until the work starts. The market value of a home that needs a lot of work is going to be lower than the repaired market value minus the repair amount, because of the extra time and risk involved.
How do you calculate what a great deal is on a rental property that needs repairs?
I use the same formula for homes that need to be repaired versus homes that are in decent shape. Everyone’s market will differ on how much of a discount buyers require for properties that need repair. In some markets investors may require a huge discount for properties that need work, because they are going to fix and flip them. In other markets there may be very little inventory and owner occupants may be willing to pay close to market value for homes that need to be repaired, because they cannot find any other houses for sale.
I want to buy a rental property for 20% less than the after repaired market value minus my costs. If a home is worth $150,000 after it is repaired, I want to buy it for $120,000 minus the repairs that are needed. If the home needs $15,000 in work I would want to buy it for $105,000. The more work the home needs, the more of a discount I want because it takes longer to repair the home and I have more carrying costs.
Do I always buy rental properties 20% below market value?
When I look back at my rental properties, a couple of purchases may have stretched my 20 percent rule. However, they were all very close; rental property number 9 may have been a stretch to reach the 20% rule. Most of the rentals I buy need at least $10,000 in work and rental property 9 needed less than $2,000 in work. Because the work was so minimal and the cash flow was good, I decided to buy the home.
Getting a great deal on a rental property is just one of the things that make a great rental property purchase. You need to make sure you also have great cash flow when you buy a rental property. Each person will have a different idea of what discount they need to get a great deal on a rental property. I want to buy properties at least 20% below market, but that may not be possible for some investors, while others might want an even larger discount.
For more information on how to buy the best rentals which will make the most money, check out my book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook and is an Amazon best seller.