DEALCHECK
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The idea behind this guide is to show you the exact steps of how to analyze a real estate deal and determine if it’s something you want to pursue.
It’s not difficult, but as with any real estate transaction, there are a number of things you need to pay close attention to. As you research a property and learn more about what you’re getting into – certain things matter greatly, and other things matter very little. My hope is that as we’re walking through this process, I can give you a good idea on what to look out for.
One of the most important things you MUST do as you’re evaluating a property are your projections.
“Projections” are basically just a series of highly informed “guesses” about how profitable a property may (or may not) be in the future. In order to figure this out, you need to do a little bit of homework and develop a thorough understanding of the income and expenses you can expect from this property on an ongoing basis.
Many, MANY of the deals you’ll see on a regular basis DON’T CASH FLOW (in fact, this is almost exclusively what I saw in my first year as a real estate investor) – and there are a lot of things that can sabotage the profitability of a rental property. Things like:
– Paying too high a price for the property
– Excessive Property Taxes
– Excessive Interest Expense
– Insurance Costs
– Maintenance, Utilities and Upkeep
– Unforeseen Disasters
– Home Owner’s Association (HOA) Fees
If a deal doesn’t cash flow, you shouldn’t buy it. PERIOD. This is why it’s crucial for you to nail down your projections and get an accurate depiction of its profitability – because frankly, your “GO” or “NO GO” decision usually boils down to the answers you get after going through these motions.
Are your projections going to be perfect? No – we aren’t fortune tellers, so we’ll never know EXACTLY what’s going to happen. Projections rarely pan out exactly as we plan, but when they’re done correctly, using realistic, information assumptions and data, they will almost always set you up with reasonably accurate expectations that won’t lead you astray. The numbers can turn out better or worse than you estimated, but they should at least unfold in somewhat of a similar fashion to what you had originally predicted.
It’s important to challenge your assumptions.
– So you think rent will be $750 per month? Says who?? Is this a reliable and unbiased source of information?
– You think the vacancy rate will be 10%? What makes you think so?
– What kinds of maintenance and repairs will you have to take care of? Are your plans realistic?
– What if one or more of your assumptions turn out to be wrong? Does the property still cash flow?
In order to come up with your best possible estimates, you need to be armed with the right information. Your inputs will literally determine EVERYTHING you use to make your decision. This is a “garbage in, garbage out” kind of thing… if you start this process with bad information (or if you just guess what the numbers will be without really getting them from a credible source), you’re not going to have a very reliable number in the end either.
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