Deals are incredibly exciting, no doubt about it. Every real estate investor loves making a new discovery, adding a great investment property to their portfolio, and watching their lines of passive income increase. That would be ideal, anyway. Whether it is your first deal or your fifth deal, we all love the excitement we get from the whole process of searching, finding and then scoring a deal.
Unfortunately, deals don’t always go like we want them to. Sometimes a property turns out to be more of a headache than you anticipated or it doesn’t reel in the profit you were expecting. Budgets get blown for all kinds of reasons, and sometimes the most diligent work on the front end can still lead to missed values, low rents or just plain bad deals on the back.
Learning through a less-than-ideal deal is part of growing and learning as an investor, but we’d like to think those kinds of growing pains are avoidable when we remember the important things about the deal above anything else.
6 Key Considerations for Your Next Real Estate Deal
Look for Good Bones
The quest for perfection can prematurely end many a wonderful deal. While it’s very easy to shop for a property like one would shop for one’s own home, remember: You’re not the one who’s going to live here. You’re looking for good bones, not perfection. Think about what would make this property a good rental from an owner’s perspective. You don’t need the granite countertops or perfect condition to have a successful rental. Besides, anything you truly don’t like can be fixed, repaired and replaced, either after you buy or over time. It may even give you an increase in property value.
From the outset, put aside aesthetic flaws and personal taste. These can be fixed later. Other factors are much more important at this stage in the game than simply how the property looks. Location is key for a property you are looking to turn quickly. Location is also very important for your long-term rentals, although for different reasons. Location, age of the home, age of the neighborhood, style of home and neighborhood — all of these factors truly go into what we call the bones of the home and they are much more important than the way a property looks on day one of the deal. All of those factors can be changed; the bones cannot.
On the note of thinking too much from a personal point of view, beware getting tangled up in your emotions about a property.
Maybe you’re in the middle of a bidding war and just don’t want to lose. Maybe you’ve just fallen in love with the idea of this place, this property. While it’s all well and good to be excited about a potential investment, when you let emotions in, you’re more prone to fudge numbers and overlook flaws to make a deal work when it simply doesn’t suit your needs and goals as an investor.
As an experienced investor, the single best piece of advice I can give is to develop a mentality of abundance. Lose all thoughts of scarcity. Never let the idea that this could be the last best deal you may ever find seep into your thoughts. If you do, you may find yourself unable to walk from a deal that you know is not good enough, but your scarcity mentality convinces you that is has to be done. Those deals are the ones that hurt the most!
Get a Good Inspector
Never overlook the crucial step of having a home inspected prior to closing a deal. Get an inspector that you trust to do a proper inspection. It is very unlikely that a seller is aware of an issue or is trying to obscure it from you. Most times, the issues that an inspector finds were issues that the owner had no idea existed or wasn’t even aware to be looking for. You can trust a reputable third party and independent inspector to give you the straight facts about the condition of a property, meaning you have more facts and can make the most informed choice — and not be bamboozled by a catastrophic problem after closing.
You can always decide after receiving a report if the topics listed are major or minor and if you are willing to walk from a deal if they are not addressed. That is your prerogative as a buyer. But at a minimum, make sure that you have the facts and are not making guesses.
Run the Numbers
Not just any numbers. Run real numbers: yours and that of the property. Investigate for yourself and look at the actual scenario. Consider how much of your money will go into renovations, repairs, and regular upkeep. Think about taxes. Think about what profit margin you’re looking for. Don’t wind up overestimating or underestimating to make a deal look better or worse than it is in reality; it’ll only hurt you in the long run.
I have seen my fair share of investors who make miscalculations on both sides. Some factor in too many expenses and never get off go because no property is ever good enough. I have seen investors who factor in nothing and end up completely flabbergasted when they are not making money on a deal. Spend a few minutes understanding what the numbers of a certain deal are and how those numbers were factored, why they were factored and how they affect the bottom line! Then make your decision.
When you do run the numbers and find that this is a deal that you want to take, don’t sit on it. Most sellers, whether individual or the bank, want to see their property move. They want to close the deal and go, and sometimes your biggest advantage in winning your bid is being prepared and ready. Have your paperwork in order as soon as you can. Move in to close without waiting around. If you know, move on. Be decisive.
The biggest takeaway from this key step is to be prepared. If you are out deal hunting and you haven’t even bothered to arrange financing, then you are not ready to be an investor. Investors are not shoppers. Investors are not speculators. Investors have their ship in order and are ready to move the second they find the right deal. Decide now if you want to be an investor or not.
Have a Plan of Action After the Deal
A deal is more than just making it. After you’ve closed, do you know what your next steps are to meet your real estate investment goals? Just like you have an overall strategy for your investments, have a plan for your new investment properties. What changes will you make immediately? What will you hold off on? Who do you need to contact in terms of renovations, property management companies, or maintenance? These are the kinds of question to put into consideration.
What are your top concerns when considering a new real estate deal?
Share your process in the comments.