Prior to joining our team, one of our newest agents, Howard Babushkin, had a successful career in flipping houses. Despite what HGTV might tell you, this is no easy feat. Buying real estate for investment purposes takes a lot of strategy. That being said, the pay off can be tremendous. So we asked Howard about what he could tell us about buying for investment. This is what he told us.
Buying for investment purposes pays off- except when it doesn't. That's why I always go in prepared. When considering buying real estate for investment purposes it’s best to leave your emotions behind. Research and hard numbers are key to making wise decisions.
When I look for a property I am really searching for two things at once. If a property is in need of renovation and the numbers make sense then maybe that property is right to flip.
If a property needs renovation but there isn’t enough profit to be made by flipping then perhaps it makes sense as an investment rental property. Here is how I determine if that makes financial sense:
My first step is always research. I determine the market value of a property after renovation and how much it will cost to make the necessary improvements. This way I have an estimate of my total investment. Next I calculate how much rental income it will generate annually. This number is my annual return. Lastly I plug the numbers into the formula:
ROI (Return of Investment) = Annual return divided by total investment
Anything over 8 percent makes sound financial sense with a target of 10-12 percent under ideal circumstances.
Always remember when making a purchase you must consider all closing costs, taxes, HOA dues and commissions to be paid and include those in your total investment costs.
Lastly, I also like to include a cushion. This dollar amount represents the unknown and helps me anticipate any costs that are unexpected. Being fully prepared will help you obtain that ideal rate of return each and every time.