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Understanding Real Estate Costs

Linda Baumgarten

Building a real estate portfolio seems like a promising path towards financial freedom, but most people don’t understand IT ISN’T CHEAP! When building your portfolio, there are a variety of upfront costs to consider including property manager fees, homeowner’s association fees, routine maintenance costs, vacancies, insurance, and even utilities.

You’d be amazed how many investors will buy property without the proper cost estimation measures. Most simply walk through the house, writing in a notepad and guessing the numbers. No checklists to make sure nothing is forgotten, no real measurements taken with tools, and not even any pictures taken of the property for later reference are made.

Calculating real estate costs for investor

Why is that bad?

First of all, there is often a wide gap between the real quote compared to your estimation due to the lack of information. This could lead to UNDERESTIMATED repair costs, which will then lead to making an offer too high and have you losing money. You might forget crucial details on the properties such as whether there is a septic system, a well, or a buried oil tank. These three items alone could cost tens of thousands of dollars!

Most importantly, if you have bad estimates, you might miss out on the opportunity of a higher profit by OVERESTIMATING the cost of the job. In this case, your offer will be too low, meaning you’ve lost the opportunity for EXTRA MONEY to put your pocket.

Secondly, after shopping around for a while, all properties will start to look the same. If you’re looking at multiple properties every week, you WILL forget which one needs fire doors and which needs new flooring. You’ll end up wasting time because you’ll then NEED to double and triple check your numbers between all the properties you are looking at, having to take multiple visits to gather information you could’ve had during your first. If you did it right the first time, you can make a decision right away – very important in a HOT MARKET where you have to act FAST.

Thirdly, negotiations can easily take MONTHS. A seller might turn you down at the beginning, but then contact you again five months later. If you have a checklist with specific measurements, as well as sufficient photos, you can pick up the NEGOTIATION from where you left off without wasting time going through the inspection process all over again. Just make sure to remember to tell the seller your offer is subject to an up-to-date inspection.

 

How can I prevent these errors?

What can you do to stop yourself from either costing or losing precious money? Simple: BE MORE PREPARED. The first step is to make sure you have a checklist prepared before looking at each property. After all, I’m sure you’re grateful that the pilots and mechanics have a checklist of what to look at before you fly on their plane! This is the best way to make sure nothing is forgotten, preventing having to make CONSTANT REVISITS.

Have a system for walking through each property, making sure you LEAVE NO STONE UNTURNED. An example would be look at the exteriors such as the roof and sliding, systems like electrical and plumbing, and all the rooms including the bathrooms and kitchen.

 

Remember: calculation, calculation, calculation.

You also MUST make sure you properly estimate the costs of materials and labor. These charges vary greatly over time between contractors, and are based on your location. You should rely on an experienced contractor or rehabber to determine the FULL COST of your renovation, comparing your notes with theirs so that your estimation skills will get better each time!

To help you calculate the labor and material costs, many big-box store websites have CALCULATORS to help you estimate the amount of materials you’ll need to complete a task. For example, if you enter the height and width of the bedroom walls, the online calculator will tell you how many gallons of paint you’ll need. Some websites, like homewyse.com and homeadvisor.com, can give you labor calculations based on the measurements and your location.

You probably aren’t a builder or an architect who has been trained to read blueprints, but you CAN visually spot potential problem areas in the property. If you find serious problems, use the professional services of a home inspector to let you know the cost of fixing the problem so that you can ADJUST YOUR OFFER accordingly.

 

Take the BEST photographs and videos for the BEST profit!

The best system for a successful offer is to TAKE PHOTOS and make WALKTHROUGH VIDEOS of the property. If you have a recording device or a smartphone that can take videos, record your walk through the property. The videos will help remind you of the flow of the house or apartment and you can voice your thoughts in the video to be written down in your office later to prevent forgetting any CRUCIAL DETAILS. You should keep each video short, ideally between one to two minutes, so that you won’t have to take a long time to find the section you are looking for.

And take photographs so you won’t have to keep going back to the videos. When you take “after” photos, try to take them with the same exact viewpoint as some of the “before” photos. You will want to show the “before and after” transformations for the CREDIBILITY and for YOUR FINANCIAL PARTNERS.

Here’s some good advice for photograph taking. Take a picture of the front of the house, ideally with the house number, and the street sign to remember where the property is. Take pictures across the street as well so you’ll remember what the neighborhood looks like and if there are any commercial buildings nearby. DON’T FORGET all areas of the property’s exterior, including the roof, gutters, drainage, steps, and landscaping. Take pictures of all mechanical systems, making sure to not miss the labels that will show model numbers, serial numbers, and manufacturing dates.

BE ORGANIZED, even when taking pictures of problem areas. If you take these photographs narrowly, the context of the issue WILL be missed out, meaning that you’ll have to go back and take the photographs again, or worse, the problem won’t be considered in the pricing. Remember that you are using these to persuade your bank or other seller to give it to you at the best price, so ORGANIZATION IS KEY for the presentation.

 

Also use the Sales Comparison and Cost Approaches!

After you’ve finally done all the proper research in making the pricing estimates for the property on your end, you should also use the SALES COMPARISON APPROACH (SCA) to make sure you have a GREAT REFERENCE for a price as well. One of the most recognizable forms of valuing real estate, seeing a SCA taken placing over a significant time frame will easily allow them to foresee any emerging trends on pricing.

SCA relies on specific attributes including price per square foot, an easy-to-understand metric that all investors can use to determine how a property SHOULD be valued. Keep in mind that SCA is merely a baseline opinion, but knowing how the neighboring properties are selling at the minimum COULD save you lots of money on your offer.

Don’t forget about the COST APPROACH as well! This is an estimation used for the land value and depreciated value for any improvements. When figuring out the value of a property, this will be useful when it comes to ZONING. If the property you are looking at isn’t considered zoned in a “residential” fashion, the value will be reduced since it will cost money to get it rezoned! This method is most reliable for newer structures and lesser for older ones. If you are looking a special use property, it is often the ONLY reliable approach.

Overall

If you want to make sure your offer for a property will earn you the most money in the end, you must DO YOUR PART and not be lazy about the inspection process. Use a checklist, hire the best help, take photographs, and make sure the pricing is in accordance to the area and location as well as the condition of the property itself.

 

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