While every successful investor understands the tenet to “buy low and sell high,” the world of real estate investing offers a few more salient reasons to negotiate the very best (i.e. lowest) price. Here are four of the most important.
- Ensures a Reasonable Rate of Return – Whether you intend to “flip” a property or hold it long term, the savvy investor should look to make a certain amount of profit based on how much capital he has invested in the property. When buying a property for resale, this value is simply the amount left over after sale is consummated and all the fees have been paid. With a longer term project, look to see how much free cash flow the property is generating. In both cases, the returns should be significantly greater than what you can earn by simply putting your money in the bank.
- Accounts for the Unexpected – If you do enough real estate investing, you will eventually run into the unexpected – a dangerous situation that requires proper remediation, an HVAC system that suddenly fails or even a foundation issue can necessitate the need for immediate extra funds. By keeping the initial costs down, you can build a contingency fund to handle these unforeseen problems.
- Makes Obtaining the Mortgage Easier – All mortgages and other real estate loans revolve around the loan to value ratio – that is, how much is being loaned against the property versus how much it is actually worth. The lower this ratio, the easier it is to obtain a loan and the more favorable the terms will be for the borrower.
- Provides an Exit Strategy – Situations develop where an investor may not want to leave his capital in a real estate project for as long as originally intended. Obtaining the best price going into a real estate investing deal helps to assure that a “fire sale” will still produce some profit or significantly mitigate any losses.
As you can see, negotiating the best possible price brings a host of benefits. It limits your exposure, maximizes your potential gains and, most importantly, allows you to deal with the entire process from a much more secure and versatile position.