New investors often go out and purchase an investment property straight away and end up paying too much for the property and then it takes them years and years for the property just to catch up with the price that they paid for it.
So how can we avoid paying too much for an investment property and how can we ensure that we pay just the right price or if possible below market value.
So how do we avoid paying too much for the investment properties that we are going to be purchasing? I’ve got some steps that you can take to make sure that you’re paying the right price.
#1 – 100/10/3/1 Rule
Tip number one is what’s called the 100/10/3/1 rule and I first heard this from real estate investor Dolf De Roos who is a very successful real estate investor and he talks about looking at 100 properties, making offers on 10 and of all those offers maybe 3 will be accepted and you would then go ahead and purchase 1 property.
So rather than doing what most investors do and simply going out and looking at 2-3 properties making an offer on one and buying one, Dolf De Roos suggest that we look at a myriad of properties up to 100 or more if possible. The reason this works and the reason this helps us paying more for a property is that we really begin to understand what a market is like when looking at hundreds of properties in that market.
What happens is we often get very emotional when we’re looking to buy investment property. We see a property and we talk to the real estate agent we’re thinking “oh my goodness this is a once in a lifetime opportunity. I need to jump on this, the real estate agent has already told me that it has offers on it, I need to go ahead and making an offer” and BAM!
I’m competing with someone else and I’m paying too much for the property because I haven’t done my research.
So follow this 100/10/3/1 rule and don’t be afraid to make offers on properties that are below the asking price which is called a lowball offer. It will give you a feel for the market. It’s not necessarily going to get accepted but it will give you a good idea of what the market is doing.
#2 – Use Checklists and Processes
This is something that I learned from the Everyday Property Investor Podcast. They talk about having checklists when you’re going to inspect a property.
Have a checklist of everything that you need to look at before you go ahead and purchase your investment property. Some things that you might want to consider are how many rooms, what’s the rental yield to the property or you might want to have a third party valuation of the property done by yourself as well.
There’s a whole bunch of different things that you can use in your checklist. A checklist helps us avoid becoming emotionally attached to a property and makes sure that we do have figures and we do the correct inspections before we go ahead and purchase.
#3 – Get Comparable Sales Data
This means going out and looking at other properties in the area that have sold that are similar to the property that you’re looking at. You can get these through professional reports.
The best way that I find to get the sorts of reports is actually through Real Estate Investar. So you’re not paying for the report for one property you are actually getting access to an online tool and you then can go through and check as many property reports as you want.
So by going through and by getting comparable sales data as what else has sold in the area, then I find that’s a great way to understand whether the property is actually at market value or whether it’s overpriced.
A tool called RipeHouse also has a valuation tool which I have found useful.
#4 – Find Previous Sales History
In my training tutorial videos over at Positive Cashflow Academy I specifically chose one investment property and we went through and we looked at whether it’s worth what were they asking for it.
This was a cheap property they were only asking about $120,000 and what we did was we looked at previous sales history for that property.
We saw that 18 months ago that property had actually been sold for around $97,000 and we also looked at the growth the area and saw that growth in the area had been stagnant and not really great all in the last 18 months. So how could a property go from $97,000 to $127,000 if the market hasn’t grown at all and nothing’s been done to the property?
So understanding what the property was sold for in the past can help you to work out what it’s worth today. You can use a free tool called On The House to find out previous sales history.
#5 – Find Out How Long The Property Has Been On The Market For
Tip number five is to find out how long the property has been on the market for. I find it’s great in negotiations and great in managing your emotions as well. If you’re in a hot market that’s moving really quickly then you are going to have to act fast and know your market before you even look at a property.
But if you’re just entering into marketing and you found a property that you like before you go ahead and make an offer find out how long the property has been on the market for.
You can use a free tool, I like to use Ripe House (they have got a free three-day trial). That will show you how long property has been on the market for and whether the property has been discounted by the real estate agents because it’s been on there for so long and hasn’t sold. I find this really good because it helps you manage your emotions.
If the property has been on the market for 100 days or more then take your time and work out whether or not this is actually worth what they are asking for because if was it probably would have sold and why hasn’t it?
That’s a great tool and you can also use that in you negotiations as well.
#6 – Get A Building and Pest Inspection Done
Very few investors actually take the time, put the effort and actually pay the money to get a building and a pest inspection done before they purchase a property.
A building inspection is where builder becomes and analyzes the property and looks for any structural issues or any other issues that you may have with the property itself. So if you’re looking at a property and it has structural issues then this will come out in the building inspection and you can ensure that you’re not paying a premium price for a house where you’re going to have to do a whole bunch of renovations just to bring up to speed anyway.
Pest inspection is the same thing, They will check the termite damage and damage of other pests so you can ensure that you’re not paying premium price for a house that has pest damage that you are going to have to pay to repair.
#7 – Try Not To Make Emotional Decisions
Tip 7 is to try not to make emotional decisions and it’s easier said than done. When we’re buying a house I think emotions do come into play a lot because it’s the house that we want to live in. We need to think about how it works for us and our family.
But when we’re purchasing an investment property we do need to be aware of our emotions because sometimes we might buy property that we love and we think the curtains are great and we love everything about it but it’s not a great financial investment.
We always need to do the figures on our property so I do suggest doing a cash flow analysis, making sure that the property is going to deliver the return on investment that you desire rather than just buying it because you like it and you think it’s a good investment even though you haven’t done the sums.
If you want help on doing the sums just head over to Get the free eBook where you can get access to whole bunch of calculators and tools that will help you as a property investor.
So there you have several ways that you can avoid paying too much for an investment property. Obviously when you’re buying a first investment property you don’t want to start out on the wrong foot, you want to start by investing in a solid property that has solid growth potential.
If you are paying too much for property then you’re going to have to wait for the market to catch up to you and you don’t want to be in that position.
You want to be (if possible) buying below value so you’ve got instant equity so you can then go ahead and grow your portfolio.