One of the mistakes you can make in real estate investing is buying overpriced houses.
When you buy lesser-priced items like shoes, cars, and a service you can get a refund in less than 24 hours.
It’s not easy to get a refund when you buy overpriced houses.
Why? It’s difficult to get your purchase money for a house because it takes time and expense to complete a real estate transaction.
To avoid falling into the trap of buying an overpriced house that may cost you financial pain, you must know how to spot an overpriced home before you start looking to purchase property.
Here are the search tools you need:
Outline Your Real Estate Investing Objective
You have to be clear about why you want to invest in a real estate market before you buy a property
Do you plan to buy and hold residential property?
Do you plan to buy and flip?
Why? Because your real estate investing goals will affect…. how you are going to buy property.
For example, a buy and hold investor’s top priority is buying cash flow-positive properties that can be rented easily.
When you take the time to clarify why you are investing, you’ll not fall into the trap of buying the wrong type of property.
Make a Budget and Stick To It
You need to draw a budget for how much you can afford to pay for a property. Once you have a budget, make sure you stick to it, so you don’t overstretch your finances.
Know Your Market Cold
I think it’s worth mentioning that you must do your market research before investing in your potential real estate market.
When you do your research, you’ll know if a market is hot, or in a downturn, the neighborhoods, property taxes, and any new developments that may influence the real estate market.
Assess the Rental Market
You want to know that people are renting in the real estate market you intend to invest.
You don’t want to invest in a market where there is no demand for rentals.
The other thing you want to know about the rental market is how affordable are the rents?
What’s the average number of days it takes to rent a property?
Use the Gross Rental Multiplier as Your Buyer’s Guide
The value of an investment property depends on the rental income it can fetch.
Anyone who tells you otherwise is trying to deceive you.
The gross rent multiplier is the tool you can use to assess the actual value of a potential value.
The formula for calculating the GRM is the rent price per month times 12 months.
For example, a 3 bed 2 bath house that rents for $1,500 per month has a GRM value of $18,000 ($1500 x 12). Assuming the same house list at $200,000 for sale. This means it’s selling at 11 times its GRM.
As a guide, you want to buy a house at a GRM lower than ten times the value. The lower the value of the GRM, the higher the chance of buying right.
Estimate the Dollar Per Square Foot
The dollar per square foot of a property is a useful measure of whether you are paying a fair market price for a property.
It’s easy to estimate the price per square foot in your local real estate market. Just look up the zip code on websites like trulia.com, and Zillow.com, and then download the average price per square foot.
For example, if a property is 1,500 sq. ft. and is selling for $300,000, this means its price per square foot is $200.
You should next find out the local real estate market’s average dollar per square foot and see if it’s below or above market value.
You should try to buy at a below market value for a house.
Final Thoughts
The bottom line is you can avoid overpriced houses when you have the necessary tools to assess the property values in a real estate market…you intend to invest.
When you use these tools I have listed above…you are less likely to go wrong.
Useful Resources
www.rentometer.com for rent value
www.Zillow.com for local real estate values
www.biggerpockets.com is the largest social networking site for real estate investors you’ll find tons of useful contact, tools and network with investors in your area
www.trulia.com for rental prices, house prices and housing trends
www.bankrate.com for finding mortgage rates
www.realtor.com for property listings
www.hud.gov the housing and urban development department publishes a guide to the rental values in a local real estate market.
www.fanniemae.com and Freddie mac provide affordable loans to homeowners and investors