Building a successful real estate investment business that creates wealth for you and your family is like playing a good game of chess – you must make your next move wisely.
That’s why learning how to evaluate juicy real estate deals is the biggest strength you can gain as an investor.
We’re going to take a quick look at 5 of the top factors you should consider before making the purchase of any real estate property – commercial, industrial or residential.
New investors can be uncertain about what to buy and what not to buy when they’re looking for properties. There are some easy definitions of what you should and should not buy. There are five things that make a good investment. If you find a property with these five things, it’s probably a good deal.
Cash Flow
Cash flow is a good reason to consider buying a property. This is a parameter and an indicator that can be pretty reliable. If there’s a $150,000 home that will cash flow a couple hundred dollars a month, you might immediately think it’s a good deal. It probably is, but consider the other four parameters as well.
Equity Capture
Certainly, you’ve heard the common adage, “You make your money when you buy, not when you sell.”
This means that your purchase price is the main factor that determines your profit later on.
If the house is worth $150,000 in Maryland, and you buy it for $125,000, you are making $25,000 in unrealized capital gain when you sign on the dotted line.
This isn’t money you can take and put in your pocket, but it’s there in your housing value. This is called equity capture. You are capturing that equity by signing a contract. You earn an immediate $25,000.
Property Appreciation
Look at that house over the course of 30 years. Over the course of 30 years, a $150,000 house with simple appreciation could be worth nearly $400,000. So, in the 30 years you could get $400,000 from $150,000. That’s not a bad investment.
Remember that you will not put $125,000 down when you make this purchase. You will probably put 20 percent down. So, if the house is $125,000, you probably put $25,000 down, and that’s your out of pocket expense.
When the investment is worth $400,000, you are highly leveraged and you earn a lot off your appreciation.
Bringing Down the Mortgage
The tenant in your property will be paying your mortgage debt down to zero. So, when you put $25,000 down on a 30-year note with a tenant in there, someone will be paying your debt for you.
Obviously, there will be vacancy time and money spent on maintenance. But, essentially that house will be paid to zero with someone else’s money.
Property Depreciation
Another way to identify whether you have a good deal is to look at depreciation. Property depreciation helps you make money.
There are a number of other tax advantages for real estate investors, so make sure you talk to a tax attorney or a CPA to help determine whether your deal is a potentially good one.
Always look at the full picture when you’re deciding whether a deal is good or bad. It’s not just about the cash flow or the sales price.
Conclusion
Be sure that you choose properties that look good based on all five of these criteria, not just one or two. These are five great questions you should ask yourself before choosing the deal you want to go with.
They can also serve by letting you know what things need to negotiate with the seller before closing on a deal. Once all five criteria get five-star treatment, you should feel pretty confident that you’ve got a juicy real estate investment deal on the line!
