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