A Simple Way to Tell If a Deal Makes Sense

[Louis Wisinski]

When you’re new to real estate, analyzing deals can feel complicated.

There are a lot of numbers, formulas, and opinions out there.

But at a basic level, most deals come down to a few simple questions:

1. What can the property sell or rent for?

Look at similar properties nearby to get a realistic idea.

2. What will it cost to fix or improve?

Be honest here and expect it to cost more than you think.

3. What are you buying it for?

This is where the deal is made or lost.

4. Is there enough room in the middle?

After all costs, fees, and time, is there still profit left?

If the numbers are tight or only work in a “perfect” scenario, it’s usually a sign to be careful.

You don’t need a complicated system to start just a clear understanding of value, cost, and margin.

Over time, the more deals you look at, the easier it gets to spot what works and what doesn’t.

For those getting started, what part of deal analysis has been the most confusing so far?

[Joe Villeneuve]

You skirted around the correct answer.  Some of these answers are correct but only when combined with others.  Stand alone answers don't matter.

1 Rent is a part of the number that matters, which is cash flow.  You can cash flow a property with high rent or low rent as long as the mortgage, taxes and insurance is covered every month.

2 Rehab cost is important, but this depends on how you pay for it...not the total amount. If you are including it in some type of loan, then the rent must also cover this. If you are paying cash for it, then you add this to the down payment as a direct cost to the REI.

3 The cost of the property also is important, but the actual cost is misunderstood by many REI. The Sale Price isn't the cost to the REI. The cash out of pocket is. The lower the cash out of pocket, the less the REI is paying for the property. This is only a part of how the "deal" is made. The other half is just as important. It's how someone/something else pays for the rest. It's the terms. Ultimately, this is what makes or breaks the deal.

4 This is true.  The spreads.