There are a lot of things to consider when evaluating a deal. As real estate investors, we must find great deals. Not good deals, but great deals where we can minimize risk, maximize annual return and control our success.
Here are the 4 most important things to remember when evaluating deals:
- Avoid Speculation as the only way to profit – Appreciation is great, but it absolutely cannot be the only way to profit. The fact is, the value of the market is out of our control. At no point in time should investors buy at market value and speculate for appreciation. Who wants to take a gamble and risk taking a loss when they can control their success by buying 30% below value? Appreciation is an extra bonus, follow the next 3 tips and never speculate as the only way to profit.
- Max 70% LTV – The total cost of purchase, fees and any repairs must be a maximum of 70% of the value of the property. If not, pass and get 10 or more prospects like it and cherry pick the best deals.
- Rents are 1.5-3% of Purchase – A property that rents for $750/month should be purchased for no more than $50,000 or rents are 1.5% of purchase. Some higher priced markets it is very tough to find this type of cash flow, you are lucky if rents are close to 1%. The best markets with the highest returns there are many deals with max 70% LTV and rents are 1.5-3% of purchase. These markets you not only minimize risk, but you maximize annual return which should be the goal of all investors. Sometimes, you can find really great cash flow deals where rents are $2400 and total cost in is only $80,000 or rents are 3% of purchase. Now that’s some cash flow!
- Strong & Multiple Exit Strategies – With equity and cash flow you end up with multiple exit strategies. You can sell at retail, sell to another real estate investor, wholesale, seller finance a sale, lease option, rent and hold, refinance, sell the note, sell the entity holding title to the property, quick claim deed the property to transfer title, etc, etc. Having multiple exit strategies is a must and significantly mitigates risk. You must also evaluate and if possible test your exit strategies to ensure you have strong exit strategies.
Here’s the recap:
Photo: Jacob Botter
Related posts:
- 5 Things you must do before purchasing investment real estate
- Real Estate Investors: How to Find Great Cash Flow Deals
- How to come up with your Offer Price on a Real Estate Deal: Do’s and Don’ts
- Outline of a Real Estate Business Plan, the first step to success
- Pain Vs. Pleasure: Evaluating Risk Tolerance in Real Estate
Got questions about this or other real estate topics? Ask on the BiggerPockets Forums.
Article Author: Ryan MoellerRyan has written 45 articles for us.
Visit Ryan's Website: http://www.realreturnrealestate.com
Ryan is the founder of Real Return Real Estate™ , a company focused on buying property at extreme discounts, selling and renting with cash flow.
Joshua Dorkin
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I got Rich Dad Poor Dad’s Real Book of Real Estate recently – this post is a concise version of many of the tenets of his book. Great advice. I like the idea that rents should never be less then 1.5% of purchase price.
Great read Ryan. Looking forward to watching the video when I get home from work
Thanks Eric, I love the Rich Dad Poor Dad books. I’ve read the original one, cashflow quadrants, real estate riches and ABC’s of Real Estate investing. My other 4 favorite books are the 4 hour work week, Goals by Brian Tracy, Emyth by Michael Gerber and The Secrets of Success by William Walker Atkinson.
1.5% rents is very important. It gives you extremely strong backup plans when doing a flip. It really mitigates risk and if you can find rents closer to 3% like in some of the better performing markets then you minimize risk and have an extremely high return. The best of both, we just found a deal in a good area of OH that rents will be 4-5% and we couldn’t be any happier.
Tim Ferris has been one of the greatest inspiratoinal public figures for me since discovering him a year ago. I haven’t read the 4 hour work week but I read nearly all his blog posts and watch any videos of him I can find. I really do need to get around to reading his book…
What kind of a read was “Goals”?
Congrats on finding that great investment property btw! Are there certain “types” of cities where you will generally find rent to value upwards of 1.5%? Like, based on the size of the city, location, industry, etc?
Eric,
Goals is an awesome book. If you apply what you learn in that book or the audio you will see increased focus, productivity and you will be amazed how close you are to achieving your goals. Basically turns you from a talker into a doer, I highly recommend it. And the 4 hour work week is a must read too.
I’m focused in OH. The best cash flow markets I have found are the less hyped markets. Big cities have way too much competition and are often way overpriced with crummy returns and high risk. Let all the followers go to those markets and clean up in the areas where the numbers truly make sense. A lot of the midwest has great cash flow and some of the smaller cities around the country. I did a ton of research and plan to do a couple webinars soon on my favorite 2 markets.
Good tips and some sound advice from Richard. I am just learning about buying investment properties and need all the information I can gather now. Thanks.
Speculation is the most commonly observed behavior seen among prospects looking to buy property. The way appreciation is described and how we all cannot be certain about the trending of market values can go each month, certainly makes for a very compelling argument how speculation is not a good basis to check profit.
Be sure you know the neighborhood you’re buying in. Sometimes looking at the numbers, a deal looks good, but if you take a closer look you might find that prices in an area are falling through the floor. We’ve had some neighborhoods where real estate prices have fallen by 60 – 70 percent over the past few years compared to higher quality areas were prices have only fallen by 10%. If you’re in a buy and hold strategy, it won’t matter if you bought a property at 70% when neighborhood prices are in a free fall. I’ve seen a lot of real estate investors accumulate big losses by buying in the wrong part of town. Another problem with buying in poor neighborhoods is you’re more likely to deal with non-paying tenants and you’ll have big repair bills from destructive or messy tenants.
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