You figure out the top purchase price for a fixer-upper by working backward from what you think the property will be worth after your repairs or cosmetic updates. You generally want your total expenses - purchase, repairs, closing costs, and holding costs - to be no more than 80% of the value of the property after you are finished. That is enough of a cushion so that if your estimates are wrong, you probably will not get hurt. The more cheaply you can buy it - under that 80% threshold - the better.
The time period from purchase to rental or sale depends on how much of the work you can do yourself, how much time you have to do it, how efficiently you can hire and manage contractors, and whether you run into any surprises. If you are inexperienced in making your own repairs, ask trained professionals to give you an estimate of the time involved. Also be sure to ask what their lead time is. A plumber who can complete a job in three weeks is not much use to you if he or she has so much work that you must give six months' notice in order to get on his or her list.
Virtually every new investor I know is of the opinion they can close on a property, make all repairs, and then sell it or receive rental income within six months. Without a great deal of experience and your full-time attention, this would be extremely unusual. You should count on nine months, at a minimum.
If you are handy, and do not have a full-time day job, doing most of the work yourself will allow you to control the timing. The next best strategy is to spend the extra money to hire topnotch subcontractors. The larger, established company will charge more, but its workers will actually show up at the job site on time and with all the materials they need. You run a much higher risk of delays if you try to find the cheapest possible plumber, who has no employees, and who works out of the back of his or her pickup truck. I am not saying this is a poor choice if you know the person or his or her reputation. I am just saying that if you know neither of those things, you are more likely to suffer unpleasant surprises than if you go with a larger company.
The third successful strategy is to minimize time on the market if your strategy depends on resale. Identify the landlords in your marketplace who own multiple properties of the type in which you want to specialize. Usually the local property management firms are good prospects. They will not share with you the names of their clients, but they will tell you if they have clients who want to increase their holdings. If you can develop a pool of buyers who will purchase anything you rehab, then you will not waste any time on marketing and sales activities.
If you plan to buy and improve properties to keep for rental income, you can tap into several pools of always-available tenants. In many communities, Section 8 and other low-income housing is scarce. Eligible renters are able to receive rent vouchers from the government if they can find qualified housing. If you are able to get on the approved list for such housing, you can have a long line of ready tenants each time you complete a rehab. The government pays the rent, the tenants generally take very good care of the property because of their lack of other options, and it is a real winwin situation.
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Note: This article was sent to us by: Wayne G. Cadill at 06282010
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