What Makes a Good Real Estate Deal?
Forbes says, “If you’re looking into real estate investments, you likely want to earn wealth on real estate based on risk you are taking while minimizing the amount of time you need to spend attending to the property. To accomplish this, you need to make some smart choices upfront when buying investment property. Your goal should be to strive to get as close as possible to as many of these optimal scenarios as possible:
What Makes a Good Real Estate Deal?
1. Pays a Fair Cash-on-Cash Return. “When you buy property you are taking money out of your liquid financial assets – stocks, bonds, CDs – and investing it in a very illiquid asset – real estate. You were earning a rate of return on your financial assets, such as 4 percent or 6 percent, and you should strive to earn a fair cash-on-cash rate of return on your real estate.” What is a fair return? It should be commensurate with the risk, The higher the risk, the greater the cash-on-cash return.
2. Doesn’t Require a Lot of Time or Managing. Some properties just require way too much time and management to make them smart investments. Examples include vacation rentals, low-quality properties in bad areas, college rentals, etc. Nice boring properties rented for as long as possible to decent credit profile tenants seem to take the least time to manage.
3. You need to look at the numbers. BiggerPockets advises: Determine the cost to repair the property. If you plan on reselling quickly for a profit, then you have to buy below market value. The old MOA (maximum allowable offer) formula is an investor’s quick rule of thumb. ARV (after repair value) X 70% – Repairs = MAO.
4. At Financially Alert, the author wants the possibility of capital appreciation potential (potential doesn’t mean it’s going to happen, but you’ll certainly want to invest in an area that can increase over time). You want to search for buys under the current market value, get back to market value and then realize appreciation over time.
5. Rents high enough to cover debt service (mortgage), property taxes, insurance, management, vacancy, expenses, and repairs – AND have a minimal profit of $100+/month
6. Cheap financing. There are ways to get 100% financing either through hard money lenders who provide all the initial financing, or private investors who want to participate with their IRAs and 401K and can provide the 20% that the banks won’t loan.
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