If you have not Read the First two parts Link them here:
Are you planning for your Future? Real Estate Investing – Part 1
Starting at Home! Real Estate Investing – Part 2
Any form of investing is about making a profit. How profit is defined and types of profits might be a little more complex than you think. These factors can be influenced by your cash on hand, tax bracket, over all income, short term vs long term goals, and the property itself.
Although the first impulse of many investors might be to put down as much money on the property to keep the payments low there are other considerations:
• The investor may not have a lot of money to put down.
• The investor may want to hold money back for repairs and or a reserve against unanticipated problems.
• By holding money back you have cash for other investment opportunities.
• The less equity you have in the property the less risk you have against another extreme economic down turn or uninsured loss to the property. The mortgage holder could be left holding taking the loss.
• The Investor may have a higher tax bracket making it more advantageous to hold back cash and maximize the deductions form mortgage interest.
There are advantages for putting a larger amount down:
• The overall monthly payments are minimized. If month to month finances are an issue it might be best to keep payments minimal.
• People in certain income situations cannot deduct “Passive Losses.” Therefore, you do not want to take a paper loss on the property. By putting more down you will lower the interest deduction. More on this latter.
• You may get a better loan and terms with a larger down payment (but not always).
When purchasing an investment property you always want to give careful consideration to how much cash you should use for the down payment. It is also important to pay attention to closing cost. Closing cost will take more cash out of pocket.
Many properties will need repair when you purchase them. This is not a bad thing as often damaged properties will price much lower. However, keep your repair cost to a minimum. Remember you are not fixing it up for you to live in. (Usually) Make sure the cost of repairs/remodels/upgrades justifies the return on rent or resale. This really depends on your market area, the demand for homes, what is considered standard materials.
For Example you hardly ever see Formica in any homes anymore. I would not recommend putting it in. If Formica is already in a home and still in good shape you may want to leave it. In this area, on the lower end Tile Counters are the Standard and even there you are seeing fewer and fewer homes with the smaller white tiles. On repair or replacement I would give strong consideration to larger tiles with narrow grout lines. Each situation is unique and you have to weigh cost against benefit and what the market expects.
When doing repairs, if you are capable consider using as much sweat equity as possible, especially when you are a new investor. You do need to have the basic skills. Often Home Depot, Lowes, and other stores offer classes on home repair and things like tiling. You can save a lot of money if you do it yourself, but it needs to be done well. Now if your time is limited you have to weigh how much it is going to cost you keeping the home off the market while you are doing the work. Most tools are not that expensive compared to the cost savings of doing the work yourself. Invest wisely in other tools you might need or see if you can rent the tools. Some people are very adept at working on homes and it is like hobby (like some people like to fix up cars), a very profitable hobby.
If you cannot do the work yourself or as you get more and more properties you will need to hire someone else to do the work for you. Talk to other investors and Realtors as to who to use. For some smaller work you may want to hire a Handy Man, they will be cheaper. But you may have to use a contractor for larger jobs. In general I find smaller contractors will do fine work at less of a price since they do not have the overhead. Be careful about advancing too much money, there are too many stores about contractors taking the money and going broke.
When working with contractors make sure you have a detailed written estimate and agreement with the contractor, make sure they have all the insurance they need (including worker’s comp), and check to see if they are licensed and bonded. When signing a contract have the contractor agree to indemnify you and hold you harmless for any losses (For example if neighbor trips over the contractors tools and sues this will obligate the contractor to defend you.) On larger jobs you may want them to get you put on the contractor’s insurance policy as an additional insured. As you have many properties and ongoing contractor needs you may want to have a master agreement signed covering all of the contractor’s work for you and get the additional insured endorsements on the policy, make sure the contractor’s insurance is always up to date and in force.
I am sure you get the idea about keeping cost down and keeping money in your pocket, but there is a flip side to this too. Don’t be Penny Wise and Pound Foolish. Sometimes you have to spend a little money to save money. Longer lasting and better quality materials may save you money in the long run. A good well paid worker is better than an underpaid worker that screws things up. You want people you work with on a regular basis to think well of you and feel appreciated, this goes beyond money and includes treating them with respect and paying attention to what they have to say to you.
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