Invest in USA Property
Pre-Purchase Investigations
How to Assess USA Residential Property Investment
The content on this page is reproduced with kind permission from Richard Lillycrop.Evaluating Potential Investment Properties
Example below of recommended due diligence when buying a USA dwelling
| Property Details | |
| 3 Bedroom, 2.5 bathroom, single family house. Built 2005 | |
| Price Paid | $80,000 |
| Actual Rehab Cost | $14,436.86 |
| Closing Costs | $767.94 |
| Property Inspection | $455.00 |
| Total Cost to Buy | $95,659.80 |
| Property Size | 2000 sq ft |
| Cost per Square Foot | $47.83 (Typical construction cost is $120-$200!) |
| Actual Gross Rent | $13,800 per year ($1,150 per month) |
| Vacancy Rate at 8% | $1,104 per year |
| Property Taxes at 1.5% | $1,200 per year |
| Insurance | $787 per year |
| Property Management at 7% | $966 per year |
| Estimated Maintenance at 8% | $1,104 per year (much lower so far) |
| Net Operating Income (NOI) | $8,639 per year ($719.92 per month) |
| Cap Rate | 9.03% |
The insured replacement cost for this property is $166,000! Which is still only $83 per square foot.
Many people assess investment properties by just looking at the rent-to-value. You need to consider the following:
- The age and type of property as expenses will vary between houses.
- The Cap Rate is a much better indication and gives you the projected return on your money, if you were to pay in 100% cash.
- If the property is financed then your returns can be increased which doesn't take into account any increase in the property's value. So worst case scenario, if you don't use finance, have no increase in value and the rents don't rise you will still be getting a minimum 9.03% return on your money each year.
On the assumption that the market recovers and the property is now worth the insured value of $166,000 and you refinance the property at 60% loan-to-value (LTV):
| Property Returns With Refinance | |
| Market Value | $166,000 |
| 60% Loan at 7.5% | $99,600 |
| Original Total Cost To Buy | $95,659.80 |
| Immediate Profit | $3,940.20 |
| Net Operating Income (NOI) | $8,363 per year ($696.92 per month) |
| Loan Payments | $7,470 per year ($622.50 per month) |
| Before Tax Cash Flow (BTCF) | $893 per year ($74.42 per month) |
By refinancing you've got all your invested money back, plus an extra $3,940, you still have $66,400 equity in the property and it has a positive cash flow each month!
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Please Note - The information contained in this section is an example for assessment purposes and should not be taken as legal or tax advice.