Note about this show. Today’s topic contains several sub-topics. Today is an overview and those subtopics will be discussed in more detail in a later show. The purpose of today’s show is to briefly touch on those subtopics but more so emphasis the main point of Don’t Overpay.
#3 Maximizing Your Property Value By Not Overpaying
Before we start, I want to welcome back my special guest Todd Dexheimer who will be adding his valuable insight to our discussion. Todd, thanks for joining me today. Why don’t you take 60 seconds to introduce yourself and your real estate background.
OK, today, we’re going to take things back to the beginning and talk about the principle of Not Overpaying for your apartment building. At first glance this topic might seem a little odd for my series. If you’re listening to this, you may already have purchased your apartment and obviously can’t go back and change that transaction. However, it’s still important to discuss because if you are considering selling your apartment, you may also be considering doing a 1031 exchange into a new building. Or, you may be considering adding another building to your portfolio. So yes we can’t go back to change your past transactions, but we can use this information to improve your future ones!
So let’s look at a few of the aspects you’ll want to consider to avoid overpaying.
Know Your Market
The first thing that’s important to understand is that each market is different. Just because a price may seem unreasonable in one market doesn’t mean it is unreasonable in the market you are investing in. It’s important to understand what other similar buildings are selling for locally. It’s important to know your competition. Are people buying strictly on ROI or are people buying based on the emotion of wanting to be in real estate regardless if it’s a good investment or not? Are you competing against individuals or institutions? Institutions often pursue larger buildings and may have access to cheaper capital. That may or may not be a good market for your to compete in, depending on your own abilities.
Know Your Goals: Cash Flow | Appreciation | ROI
Are you looking for an asset that’s going to pay your dividends right away? Are you counting on an increased value when you sell in 3-5 years? Are you looking for a specific ROI? Or are you looking for a place to park cash so that you can have various tax advantages?
Usually there is some combination of the above and it’s important to know what’s most important to yourself.
If immediate cash-flow is the main goal, then a simple income and expense projection can determine if you will succeed. However, if you need to park your money in a safe place and don’t mind contributing on a regular basis, then you might be able to outbid other investors but still achieve your goals. Just make sure the location you purchase has a strong outlook and realize you’re making a bet on the market. When making bets, it’s important to play with money that you can afford to loose.
Know your potential
Condition of property vs. what it could / should be
Value ad through improving condition, increasing rent, improving management, decreasing unnecessary or excessive expenses.
Are you purchasing a property that can be improved? Or is it one that is brand new and already at its maximum performance. If you buy brand new, your business strategy will be less about making improvements and more about tenant retention and maintenance. These are very important aspects of your business that need to be focused on to avoid losing value in your property.
So that’s a very brief overview of various considerations when purchasing a property. We can go deeper into each of those in a later episode, but the main point for today is don’t overpay.
If you’re used to paying $200,000 / door in your market, don’t get too excited about seeing $100,000 / door in a different market without verifying that the price is reasonable in that new market. Perhaps even that price is too much for that market.
If your goal is to achieve maximum cash-flow on day 1, then don’t buy a property that has more historical expenses than it does historical income.
If your goal is to force appreciation by increasing rents, make sure the current rents aren’t already at the highest point the market will bear.
Thanks for watching this episode of Maximizing Your Property Value. I appreciate Todd’s contributions to this topic.
If you are thinking about selling your apartment building now or in the near future, contact me to learn how I can help YOU maximize your property value.
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