Why would you buy investment property without seeing it? It's a numbers game.
Whether or not you see the property before you make an offer isn't nearly as
important as making sure the numbers make sense.
A man in California used to just send out offers on a hundred MLS listings at
a time, offering 25% less than the asking price on each one. Occasionally a few
sellers would accept his offers. He never had to look at the homes beforehand.
Including an "inspection and approval" clause in the offer meant he could always
back out of the deal later when he saw the house. Meanwhile, he efficiently
found the truly motivated sellers.
This true story demonstrates that with a good clause or two in the contract,
you don't have to worry about making an offer before you see a property. It's
true when you buy investment property or your next home. When it isn't
everything the seller says it is, you can reject the deal with little or no
loss. So why wouldn't you want to look at the property?
Buy Investment Property By Numbers
The main reason you might skip looking at a property before making an offer
is time. This is certainly true if the property is far away. If you don't get a
price that makes sense, why spend your time traveling to look at real estate
investments? A price and terms that make sense - this is what is important. Of
course you'll probably want to look at the actual property eventually, but
looking at the numbers is how you invest.
Investors value income property according to current cash flow (or should if
they want safe and viable investments), so start by verifying income. Get the
actual income figures for the past 12 months. Always consider the potential
income if rents are raised, vending machines are added, etc., but base your
offer on the current income.
Verify all expenses with investment properties. If any expenses listed by the
seller seem unusually low, they most likely are. Just substitute your own best
guess in place of any suspicious numbers.
After you determine the net operating income, apply the appropriate
capitalization rate to arrive at the value. If you're not sure how to do this,
get help. However, you really should understand the principle of how to figure a
cap rate. This is a numbers game you're playing. Calculate loan payments (talk
to your banker), and see how much cash flow you'll have. Then you can figure
your cash-on-cash return based on how much of your own money you put into the
deal. Just divide the cash flow by your investment.
When the numbers work, you can safely make an offer. Inspections will tell
you if there are problems that will affect the cash flow. You can always
renegotiate if there are such problems (assuming you made your approval of all
inspections a contingency of the offer). Of course, you can even go take a look
now that you are truly ready to buy that investment property.