Mastering The Art of Buying From Other Investors
December 12, 2020
When the property market is thriving, a lot of people will be inspired to become investors. But not all of them can withstand the changing conditions and would soon become motivated sellers who present a good opportunity for more seasoned investors.
Especially investors who are managing a long-distance property, occupied but no rented properties, and having financial troubles in closing a loan can all present you a good deal. Finding them could be easy through property listings and neighborhood research.
But how do you handle them? Because, as investors, they would also be looking to make as much profit as they can, may have similar concerns as you do, and sometimes can open up newer opportunities you might not have been aware of.
Here is a brief rundown on how you can best utilize a deal with another investor.
What Else Do You Own?
Investors are sellers with more equity than a regular seller. So, start by asking what else they own. This simple question can help you get better deals where you may be able to close two properties at a time and even get a second deal at favorable terms. But be sure that you are prepared well before undertaking such double property deals as the risk is higher.
Consider a real-life example. A seller has two properties, one located in a posh location with considerable equity. And the other in a not-so-well location. Now the seller has been unsuccessful in getting his second property to sell. So by offering him to buy both properties, a guy was able to buy the second one at a highly discounted rate. Now the realtor has two good houses and if he was to sell the second house, it would bring him a good profit as he got it at a discounted rate.
When you make such package deals, make sure all the loan terms of any are properly understood and taken care of in the sale agreement. And also make sure that you have the adequate financial arrangements and management skills required to make it a profitable deal.
Find Out The Reason
Every seller has a reason to sell a property especially when they want to sell it at a price that you wish them to.
For some, it could be the inconvenience associated with managing a property. Long-distance properties are typically harder to manage and investors who jumped into such investments will soon be wanting to sell those properties as handling them either gets too expensive or inconvenient. It might be difficult to manage tenants and pay for maintenance costs when the property is far away.
For some other sellers, money could be the problem. When a new investor borrows money to purchase a property at near retail price, they will be running on negative cash flow. The rental income from the property may not suffice the expenses and monthly due payments. Whereas wholesale buyers can manage such properties easily due to their high cash flow and lesser reliance on loans.
You should always remember that the big money comes from property appreciation value and not from the monthly rental incomes. When you are doing real estate business for the long term, high retail priced houses will prove to be a good fortune as their values increase over the years. But that may not be the case for small-time new investors. Their cash flow will not be able to lessen the burden of loan payments.
Understanding why a seller wants to sell will give you good ideas to make a better deal. For instance, in the first case of long-distance management, you can try to lease the property for some time and sell it when you find a good deal. The owner will be okay with this arrangement as long as it takes the management problem away.
Look For The Best Deal, Not The Best
House
Expensive large houses may present an attractive investment choice but in reality, they bring in little in terms of property value. Remember, it is the lot that appreciates while the house costs you in terms of maintenance. The location of the property should be a priority over the quality of the house. As long as the house is functional and rentable that would be sufficient. Look for the best lot you can afford as they have better returns. ,
When it comes to properties, quantity does not always mean more value. Instead of trying to increase value by accumulating houses, try to concentrate on acquiring good lots.
Buy One, But Tick All The Boxes Right
Buying properties is easier than selling them. The more properties you accumulate, the riskier it gets. So, be careful not to buy too many houses that you may not be able to sell at a profit. Be selective about the properties you choose to buy.
You might face some challenges when you buy from other investors. investors tend to be thrifty and want to make the most out of a deal. They will probably want you to do the heavy lifting like tenant management, repairs and might even want you to buy more than one property at a time to minimize their taxes and costs.
In these cases, you must remember not to lower your standards to buy a group of houses even when it seems like you are getting them at a bargain price. When you buy a property, check for all the standard checklists you have to make it a profitable venture.
Make sure the extra risk you are taking is worth the bargain you are given. Make sure the houses are rentable and are attractive in terms of mortgage requirements. Avoid junker houses that tenants avoid.
Low Rents? That’s The Opportunity
Some landlords are too good to their tenants for a fault. Some landlords don’t raise the rent for about 10 years which while a rarity is not good tenant management. Good tenants will agree to pay the rent as long as the house is in good living conditions. But this mistake on the landlord’s part can give investors like you a good opportunity.
For instance, if the owner is making a gross monthly rental income of $5000 from say 5 houses, you can offer a monthly rental income of around $4000 and assure him of taking full responsibility for tenant management, rent collection and maintenance costs up to $100 per month.
Your management efforts should make up for the decrease in gross income the landlord gets. For a landlord tired of managing, this would be a good deal. You can further negotiate and come to a better deal that suits both parties.
You can also offer to lease the properties for the current value. A longer-term is beneficial for you as property values tend to go up every year. You act like a property manager for the owner. And at the end of each lease term, you can renegotiate the options to buy the houses. Make a plan with these estimates, print it out, and show the owner as it will help them better understand the benefits of such a deal.
The owner need not pay taxes for the first lease term and can keep the capital gain. He can repay loans easily and can also continue to get tax-sheltered rental income. And when they do sell it to you, it is hassle-free as they don’t have to pay for repairs, move out tenants or pay commissions. It is a good deal that will be beneficial for both you and the landlord.
Conclusion
It is possible to make great deals when you find other investors as sellers. You can get package deals where you can buy properties at a discount, have a wider range of options to generate cash flow, financing, and property management.
Investors will also be more open to making lease terms and profitable deals as long as it gives them benefits as well which you may not be able to get regular sellers to agree with. So, look for opportunities to secure good houses from other investors and make smart choices to get the best out of every deal.