Before buying any property , you should get an engineering report , to make sure that the main systems work ; electric , gas , and water . There should not be any structural problems with these , the foundation , or the beams . There may be plenty of minor faults such as chipped paint , but there should be reflected in a lower selling price . You should welcome such defects because you can increase your profits by fixing them.
The bank will do an appraisal , but it will be a cursory one . Instead of trying to pinpoint the exact value for your house , the bank appraiser will use the selling price as a starting point , and then test it for reasonableness . A good (well done , not necessarily favorable )appraisal will tell you what the market thinks of the house and why.
Cash flow on real estate is pretty much discretionary , at least after the minimum debt service charges are paid off . You can reinvest it in the property to maintain or improve it , you can prepay your mortgage or you can spend it ,either on more real estate ,or on other items . A property can even be “ milked ” for short periods of time by deferring maintenance , but that is not a wise long-term strategy . Any way you slice it, cash flow is what ultimately drives the return on real estate . If cash flow after expenses and debt service is negative , the property is priced too high and likely to go down in value . For this reason , one should not think in terms of sacrificing cash flow for “appreciation .”
Real estate should be bought for intrinsic(i.e., cash flow) rather than resale value . This is true of stocks, but particularly told in numerous places, most notably by John Paul Getty , of Florida swamp land in the 1920s; in which “ investors ” bought and sold binders, or contracts, on real estate ; with the intention of “flipping” them within a short time . When one skeptical investor asked the agent to show him the land ,which was under a swamp, the agent explained ,“ This real estate is for trading , not for owning .” When the craze is over , some hapless investor will be left with a worthless piece of property . An only slightly less insidious form of “real estate ” is one that is uneconomical , except for tax breaks . Then the investor is hostage to changes in the Tax Code . |
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