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PRE–PURCHASE INVESTIGATIONS

HOW TO ASSESS USA RESIDENTIAL PROPERTY INVESTMENT

The content on this page is reproduced with kind permission from Richard Lillycrop.

Evaluating Potential Investment Properties

Example below of recommended due diligence when buying a USA dwelling

Property Details
3 Bedroom, 2.5 bathroom, single family house. Built 2005
Price Paid$80,000
Actual Rehab Cost$14,436.86
Closing Costs$767.94
Property Inspection$455.00
Total Cost to Buy$95,659.80
Property Size2000 sq ft
Cost per Square Foot$47.83 (Typical construction cost is $120-$200!)
Actual Gross Rent$13,800 per year ($1,150 per month)
Vacancy Rate at 8%$1,104 per year
Property Taxes at 1.5%$1,200 per year
Insurance$787 per year
Property Management at 7%$966 per year
Estimated Maintenance at 8%$1,104 per year (much lower so far)
Net Operating Income (NOI)$8,639 per year ($719.92 per month)
Cap Rate9.03%

The insured replacement cost for this property is $166,000! Which is still only $83 per square foot.

Many people assess investment properties by just looking at the rent-to-value. You need to consider the following:

  • The age and type of property as expenses will vary between houses.
  • The Cap Rate is a much better indication and gives you the projected return on your money, if you were to pay in 100% cash.
  • If the property is financed then your returns can be increased which doesn't take into account any increase in the property's value. So worst case scenario, if you don't use finance, have no increase in value and the rents don't rise you will still be getting a minimum 9.03% return on your money each year.

On the assumption that the market recovers and the property is now worth the insured value of $166,000 and you refinance the property at 60% loan-to-value (LTV):

Property Returns With Refinance
Market Value$166,000
60% Loan at 7.5%$99,600
Original Total Cost To Buy$95,659.80
Immediate Profit$3,940.20
Net Operating Income (NOI)$8,363 per year ($696.92 per month)
Loan Payments$7,470 per year ($622.50 per month)
Before Tax Cash Flow (BTCF)$893 per year ($74.42 per month)

By refinancing you've got all your invested money back, plus an extra $3,940, you still have $66,400 equity in the property and it has a positive cash flow each month!

If you'd like to profit from a deal like this one, please fill out the INBIB registration form, to receive the latest deals from our network of USA brokers.

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Please Note - The information contained in this section is an example for assessment purposes and should not be taken as legal or tax advice.

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