Real Estate Investing Blog

Successful buy-to-let property investors have the skill to quickly determine the cash positive offer value for a below market value (BMV) property.

Stock exchange speculators are prepared to spend large sums of hard earned cash on technical software analysis tools and hundreds of research hours before they part with a tenth of their monthly salary to buy a small amount of shares.

Yet, most novice property investors are prepared to sign offers to purchase property worth more than 10 times their monthly salary based on a “hot” tip or glossy developers marketing brochures without doing any proper due diligence.

The aim of the simple 7 step desk top due diligence is to quickly determine the offer value that will leave your buy-to-let property cash positive from day one.

Step one: Determine the realistic market value of the property.

This is the most important step as the market value will determine what the financial institutions will be prepared to finance.

Step two: Determine the realistic market related income (rental) for the property.

The achievable rental less a vacancy risk factor will determine the sustainable annual income from the property.

Step three: Determine the running expenses of the property.

Running expenses include body corporate levies, municipal Rates and Taxes, rental agent fees, bond interest servicing costs and repairs and maintenance of the property.

Step four: Determine the once off acquisition cost of the property.

Once off acquisition cost include transfer fees, bond registration fees, sales agent commission if applicable and initial repair fees.

Step five: Determine the expected capital growth rate for the property.

The capital growth rate of the property is the biggest factor that will determine your future profits and wealth creation potential. Always ensure to only buy high growth BMV properties.

Step six: Determine the properties monthly shortfall or surplus.

The properties income less expenses and risk provision for maintenance and vacancies determines the shortfall or surplus. The only expense that is variable is the interest on the bond.

Step seven: Calculate the breakeven point for the property and the offer value.

All the properties income and expenses are fixed other than the interest payment on the bond. You just need to determine the bond amount (interest expense) that will leave the property at breakeven or cash positive. That bond amount is the cash positive offer value. Remember to include the once off acquisition cost of the property in your bond amount when determining the offer value.

High growth BMV cash positive properties are not always available and require some creative sourcing techniques.

The level of finance available for the property plays the most important role in determining the offer value. Financing BMV properties at market value leaves available cash on your bond to pay for the once off acquisition cost of the property and to cover potential initial short falls.

Always buy below market value and determine your offer value before you make the offer.