The most important thing for beginner real estate investors is to find great deals. Not good ones, but great ones. Here are some steps that will help investors find those great cash flow deals.
8 Steps to Finding Great Cash Flow Deals
Note: Finding great deals takes time and patience. Often times, new investors get impatient and jump into the first property that gets them excited. Keeping emotion out of the equation and being methodical is key when buying rental properties.
- Define your criteria – Rents should be approximately twice PITI (Payment+Tax+Insurance) or 1.5-3% of Purchase + Repairs.
- Define high cash flow areas to target – Nice suburbs and areas in most cities can result in housing prices that are four or more times some of the cheaper areas, but the rents are not four times as high. The areas to find the best cash flow properties are usually in the decent areas. Some of the most successful cash flow investors make their money with class C or class B properties.
Definitely stay out of war-zones, but you can cash flow well in the areas that have potential, low housing prices, and rents that are really high compared to purchase. Remember, this is a business purchase, so you don’t have to be comfortable living there yourself. You just have to like the numbers and do your due diligence to confirm success.
- Get as many properties into your pipeline as possible – The more properties you get into your pipeline that fit your criteria, the more and better deals you will have to cherry pick from. It is called playing the numbers game.
- Create efficient systems to filter out the duds – Avoid time consuming due diligence on properties that are duds or not yet under contract. Due diligence can wait for properties that you’ve got under contract; you must get good at quickly determining market value, estimating ballpark rehab costs, and deciding whether to proceed with an offer.
- Write lots of offers – Play the numbers, write a lot of offers; the worst case scenario is you’ll get a No. It doesn’t matter what the asking price is, investors should only care about what the property is worth to them.
That said, if you develop a relationship with a source that is feeding you great deals over and over, value the relationship and do not insult them with low ball offers. Just make offers on deals that make sense and maybe, verbally communicate your lowball offers.
- Complete thorough due diligence on contracted properties – Once a property is under contract, you need to have an inspection, get rehab bids, confirm market value, confirm you have multiple exit strategies and make sure you have plenty of equity and cash flow in order to make mistakes and run into surprises, and still profit. For rentals, make the property rentable. Avoid unneeded upgrades that will not add to the positive cash flow.
- Cherry pick only the best deals – With a lot of deals that fit your criteria coming into your pipeline, you have the advantage of picking only the best.
- Find Great Property Managers and Tenants – Tenant and Property Management issues can result in substantial headaches, even losses. There is no excuse for poor management; find a good manager and pay them well. Many do-it-yourselfers try to manage themselves and quickly run the property into the ground. This step is crucial to success and will allow you to generate passive income for years to come.