Why Savvy Investors Overpay for Investment Properties
Sophisticated investors understand that overpaying for an investment property can be a smart move. For example, let’s say a property is listed for $500,000, but a sophisticated investor offers $550,000.
The average investor sees $50k more and thinks, woah that’s a lot, but the savvy investor only sees $15k. Why does he only see $15k? He’s looking at the money he’ll be out of pocket. For example, if the investor was going to put down 30% on a half million dollar property that’s $150k, right? Well, the down payment on a $550k property is $165k, which is a difference of only $15k. And the difference monthly on a 6% loan is only about $300. So even if he’s only going to cash flow $700 instead of $1000 month, it’s still a win, right?
Additionally, if the property appreciates in value by 5% per year, the investor could sell it for $688,000 in five years, generating a profit of $138,000. Again, a win, right?
He may also be thinking over time he anticipates interest rates coming down and being able to refinance the asset. If he were to get that interest rate from 6% to 5% thats the difference in the $300 more he’s paying because of the initial $50k. Now, if he were able to get that down to 4%, his monthly payment would drop by another $300 per month. Then he’s paying LESS than he would’ve paid at $500k at 6% for the same property.
The savvy investor looks long term and thinks long term. He understands where the market is, where it’s going and what risks he is willing to take. If you are competing against a sophisticated investor, it might be a good idea to think like one.