Though inflation-fighting mortgage rates have helped the real estate market cool in recent months, it doesn’t mean the market is a breeze to buy in. Due to low inventory and specific, individual market factors, there’s still a risk of getting involved in bidding wars and overpaying for a property.
So how do smart investors keep from overpaying when the competition heats up? Following these rules will keep your profit margins where they need to be!
5 Rules for Preventing Overpaying When Acquiring Another Property
#1: Work out the numbers ahead of time
Investors don’t act on hunches, whims, or emotions. While these can factor in, the most important measure of a deal is the details. Investors should have detailed, realistic estimates of property expenses and projected rental income. This helps you calculate close-to-accurate profit margins. You’ll then be able to see how much you can afford.
Remember, too, that when you’re relying on financing, the amount of money you put down can put you in a better position with your mortgage payment. With interest rates what they are, putting more money down can help offset the added cost.
Regardless, investors should know before they ever consider an investment property what numbers they need to make it work and achieve the success they’re striving for.
#2: Don't waive the wrong things
In a competitive market, buyers do everything they can to make their offers more attractive. Unfortunately, some of those things can seriously backfire. There are two primary areas where buyers negotiate apart from the asking price: inspection and appraisal. It’s never wise to completely waive an inspection. It could uncover deal-breaking issues that you’re not prepared to deal with or pay for without blowing your margins.
With that said, most investors are prepared to do some level of property rehab after they close. If that’s you, you can always waive the seller's responsibility to fix certain issues that come up in the inspection. It’s perfectly reasonable to demand an inspection but waive minor items up to a certain amount.
If you were already planning on doing it, make it clear to the seller what you do and do not expect them to fix. It makes a more attractive offer. It saves on time and cost in an already costly venture.
Waiving appraisal isn’t possible with traditional lending, so don’t even go there. Banks want to ensure that the assets they back are worth the money, and rightfully so. However, if you’re planning to buy-and-hold – knowing that most properties increase in value over time – you may consider some appraisal wiggle room.
This can be advantageous when bidding spirals out of control. Your bid is still subject to appraisal – so you won’t overpay – but you can offer to pay up to a certain amount above appraisal if it comes back less than your initial bid.
#3: Be willing to wait
We completely understand why investors are in a hurry to acquire their SFRs. The more time you have with an investment, the more time there is for both cash flow and property value to grow. At the same time, it’s far better to be patient than to jump on an investment opportunity that doesn’t fit your needs.
Sometimes it’s wise to fight that sense of urgency in favor of diligence and patience.
#4: Play the market
Passive real estate investors have an edge over local investors and traditional homebuyers. They’re not tied to the markets where they live and work. Because of this, investors can be more strategic about where they invest!
For example, an investor living in an expensive California market and making a Silicon Valley salary will be able to afford much more in an affordable Southern market than in their backyard. Not only does this give room for efficient portfolio diversification, but it allows investors to acquire higher-quality properties for less. Remember, cost and income are both relative to market affordability.
#5: Avoid traditional homebuying altogether
Of course, the best solution for real estate investors is to simply refuse to participate in a market frenzy altogether. You can still invest in real estate through a turnkey partner such as REI Nation! These partners have already done the work of finding, negotiating, and acquiring investment-ready properties. It’s not on you to find the property, to determine if it’s right for your portfolio, or to go through the pains of trying to win bids and negotiate.
That work’s been done. Instead, you can step right into the ownership of pre-vetted income-generating investment properties!
Ready to benefit from everything real estate investing has to offer?
Find out more from an REI Nation portfolio advisor!
