In the eyes of the real estate investor, there’s nothing quite like finding a piece of undervalued real estate. If it’s your first acquisition, it can set the wheels in motion for some bigger purchases in the future. If you are someone who has been in the game for a long time, like Pedro Martin, it just whets the appetite for the industry even more.
Of course, you’re not alone in your hunt for such a deal. Likewise, vendors themselves aren’t prepared to just give away their properties. This is why it becomes very difficult to find real estate at knock-down rates, but through the course of this guide we are going to pinpoint some of the best tips to help you along your way and ultimately supercharge your investments.
Looking at a property’s replacement value
This is one of those equations that a lot of people don’t even think about. One of the main reasons it is ignored is because it’s rare to find an empty plot on a street nowadays, but if you do stumble across one it is worth doing your homework.
This is because an empty plot can tell you so much about the state of the property you are thinking about investing in. If it happens to be on the market for the same price as the already-built property, those dollar signs should be spinning in your head. This is an immediate signal that the area is desirable, and the house you are looking at is undervalued.
In other words, get your check book out quickly and make the purchase before someone else does.
How does the property compare to others nearby?
This is one of the oldest tests in the book, but its rate of success will never dwindle. The power of the internet and other real estate tools means that you can quickly find out information about the price of rival properties. Some of these properties might currently be on the market, while others might have been sold in the past. Regardless, the information is out there.
Suffice to say, if there is a large discrepancy between the two prices, you are onto a winner. You will of course have to perform some due diligence to find out just why there is a difference in price, but if all of your checks come back clean you should again make your move fast and add it to your portfolio.
The simple cap rate formula
This is one of the simplest formulas that any real estate investor should have in their arsenal. In short, you need to calculate the potentially annual income from the property, divided by its market value.
It’s at this point that you again need to start comparing. Find out what the cap rate of nearby properties is and if the one you are looking at tends to have more favorable figures, it stands to reason that this is the time that you make your move.