Articles

How to Recognize a Good Real Estate Investment Deal | Epic Real Estate Investing


The answer to just about any real estate investing
question you can think of is… “It depends.” The question, “Is this a good deal?” No exception.
I hear this specific question all the time, and I see the question asked in online forums
all the time. I mean ALL THE TIME. The answer is completely dependent on the person asking
the question’s investing goal. Is the goal to flip or hold? If the goal is to flip, what’s the minimum
profit they’d be willing to take? If the goal is to hold, what’s the minimum
ROI they’d accept? Is the goal quick money… or maximum money? These are important questions to be asked
before the original question, “Is this a good deal?” can be accurately answered. However,
a quick analysis to determine a clear initial opinion of “good deal” or “bad deal” can be
had by using a simple acronym that was taught to me years ago… C.L.E.A.R. I still use
it today. C is for Cash Flow Cash flow is the monthly income that’s left
over after all property expenses have been paid. In my opinion, an investor should never
purchase a property unless they are prepared to hold on to it. If you find yourself having
to hold on to a property, particularly one you had intended to flip, the property should
pay you while you do hold on to it… i.e. cash flow. So, question #1 is, “Will this
property cash flow?” If it won’t, that would typically be my first indicator that this
might not be a good deal. L is for Leverage Leverage sometimes gets a bad rap, but mostly
from inexperienced investors. Leverage is important as it enables you to use less of
your own cash and purchase more property than you otherwise could without leverage. Additionally,
your rate of return (ROI) is positively and exponentially impacted through cash flow and
appreciation. “No money down” is the ultimate leveraged position and is very attractive
for most investors, but is not without its risks and should be approached with caution.
Nonetheless, leverage will typically work in favor of the experienced and educated investor.
So, question #2 is, “How much can I leverage?” As long as the property cash flows, I would
say “The more the better!”, but you know your situation better than I do. E is for Equity Equity is the difference between what a person
owes on a property and what the property is worth. When analyzing a property, equity can
be perceived from multiple angles, such as a: Rezoning Potential
Discounted Price Fix-Up Potential
Improved Management Potential Equity can be created in multiple ways, but
buying a property with the equity “built-in” is the best way. Distressed property owners
and investors that want out of their property are my favorite sources for equity purchases.
One person’s problem is another’s opportunity — both win in this scenario. A is for Appreciation Anticipating appreciation is a gamble, and
many gamblers… uh… err… investors… do just that, gamble. I’m very conservative
and hate to lose money, and there’s probably no faster way in real estate to lose money
than by ignoring the cash flow and equity rule, pushing in all your chips and betting
on appreciation. If your property passes the cash flow and equity tests, consider appreciation
a bonus or “icing on the cake.” Be a smart investor and do not make appreciation your
primary buying criteria. R is for Risk What most people don’t realize is that risk
can be virtually eliminated from real estate investing by following these three rules: 1. Don’t buy any property unless it cash flows,
even if “Fix n’ Flip” is your strategy. 2. Know your state’s real estate laws and
write good purchase agreements with plenty of room for you to change your mind during
escrow if something doesn’t look right. 3. Build a strong team of experienced professionals
to work with, specifically your CPA, rehab contractors and property managers. No investment is “risk free,” but by giving
these three areas of your real estate investing business a great deal of attention, real estate
is of the safest investments I know. So, get “CLEAR” on your investing opportunities,
and quickly distinguishing the good deals from the bad ones will be a snap. I’m Matt Theriault of Epic Real Estate, and
this has been another episode of Financial Freedom Friday. See you next week.

Leave a Reply

Your email address will not be published. Required fields are marked *