How to spot a great deal... in 10 seconds or less

Many people get stuck on the analysis of a property – they are afraid to make a mistake!

This is commonly known as analysis paralysis and is very common in left-brained

engineering types of people.

In general, you should act on a deal if you have collected 70% of the information. If you

wait for 90% or more, the deal will probably be gone.

Acting on a deal requires making quick decisions, and making quick decisions requires

knowing your deal criteria up front and taking calculated risks.

So everyone is looking for a great real estate deal. But what exactly is a great deal? Ask

10 different people and you’ll get 10 different answers.

Why is that? Because the answer depends on the needs of the investor. Are they looking

for…

Cash flow from rental properties? And how much cash flow do they expect?

Equity gains from flipping property? How much of a gain?

Now for those of you who don’t know what these words mean, here are some quick

definitions…

Cash Flow

The movement of cash, either positive or negative amounts, through an investment

vehicle. You receive positive cash flow or you pay negative cash flow.

For real estate, the basic formula is:

Total Income – Total Expenses = Cash flow

Equity

The amount of money left over after all liabilities/debts are subtracted from the

market value of an asset/investment. For real estate, the basic formula is:

Total Assets (Market Value of Investment) – Total Liabilities = Equity

So based on these definitions, what type of deal are you looking for?

Here’s a general rule of thumb to follow…

Rental properties generate cash flow

Flip properties generate equity gains

Decide up front what type of deal you want, and then start looking for that specific type

of deal.

Your next step is to define your deal criteria. This is where the knowledge of an

experience real estate investor comes in handy. It just so happens we’ve already done

that work for you…

Rentals

To fully analyze a rental property for profit potential requires collecting all of the income

and expense information from the vendor and, most importantly, verifying that

information.

When initially you’re looking for rental deals in the newspaper or even with realtors, you

will almost never have access to this type of financial information. Even if you did, a full

cash flow analysis of every property would be time consuming.

To solve this problem, you need a ‘rough filter’ to allow yourself to sort through a large

number of properties very quickly.

Here’s a quick 3-step process you can use to decide if the deal is worth your time to

analyze further. You can either perform this calculation in your head or with a calculator

in 10 seconds or less…

1. Determine the total annual income of the property

2. Determine the purchase price of the property

3. Divide the purchase price by 10 to determine the minimum annual income

required

If the total annual income is:

• Less than the minimum annual income, it probably IS NOT a good deal

• More than the minimum annual income, it probably IS a good deal

Remember… for rental property, a good deal is one which generates cash flow. The

property may still be priced under market value and could be a bargain, but it is not a

good deal from a cash flow perspective.

Let’s look at two examples…

Example #1:

Joe finds a duplex listed on the MLS for $150,000

Total monthly rent is $700 per unit = $700 x 2 = $1400 per month

Total annual income = $1400 x 12 = $16,800

Minimum annual income = $150,000 / 10 = $15,000

The total annual income is more than the minimum annual income, therefore, this

is probably a good deal and requires further analysis of income and expenses.

Example #2:

Mary finds a single family home listed on the MLS for $180,000

Total monthly rent is $1200 per month

Total annual income = $1200 x 12 = $14,400

Minimum annual income = $180,000 / 10 = $18,000

The total annual income is less than the minimum annual income, therefore, this

is probably NOT a good deal. You could still perform a further analysis of

income and expenses, but chances are it will not cash flow.

This technique is just a general rule of thumb to help you save time when looking at

deals. There are exceptions to this rule and by using it, you will miss some deals. But if

you’re trying to sift through a lot of properties, the time savings will be well worth it.

Flips

The process for analyzing a property for flipping is much easier than for rentals.

However, it does require knowledge of:

• Market value of similar properties in the area

• Approximate cost of any repairs or renovations required for the property

Market values can be determined by personally studying the real estate market, or by

asking a realtor for help. Repair or renovation costs can be determined using a cost guide

provided by a property inspector, or by asking a contractor for an estimate.

Here’s a quick 5-step process you can use to quickly determine if a property is probably

a good deal for flipping. You can either perform this calculation in your head or with a

calculator in 10 seconds or less…

1. Determine the purchase price of the property

2. Determine the cost of any repairs required for the property

3. Add the purchase price and cost of repairs to determine the After Repaired Value

(ARV)

4. Determine the market value of the property if the property was in good condition

5. Determine the price discount = After Repaired Value / Purchase Price * 100

‘After Repaired Value’ means the value of the property after all renovations are

complete, and the property is ready for sale.

If the price discount is:

• 81% to 100% of the property market value, it probably IS NOT a good deal

• 80% or less of the property market value, it probably IS a good deal

Remember… for flip property, a good deal is one which generates equity gains. The

property may still generate cash flow and could be a bargain as a rental, but it is not a

good deal from an equity gain perspective.

Let’s look at two examples…

Example #1:

Bill finds a condo listed on the MLS for $110,000

He determines the market value for a similar condo in good condition is $160,000

The condo needs $10,000 worth of repairs

Purchase price = $110,000

Repairs/renovations = $10,000

After repaired value = Purchase price + repairs = $110,000 + $10,000 = $120,000

Market value = $160,000

Discount = After repaired value / Market value = $120,000 / $160,000 * 100 =

75%

The price discount is 80% or less of the property market value, therefore, this is

probably a good deal and requires further analysis.

Example #2:

Wendy finds a single family home listed on the MLS for $220,000

She determines the market value for a property in good condition is $240,000

The condo needs $5,000 worth of repairs

Purchase price = $220,000

Repairs/renovations = $5,000

After repaired value = Purchase price + repairs = $220,000 + $5,000 = $225,000

Market value = $240,000

Discount = After repaired value / Market value = $225,000 / $240,000 * 100 =

93.7%

The price discount is 81% to 100% of the property market value, therefore, this is

probably NOT a good deal.

The above method allows you to buy property at wholesale prices (below market). You

can use lower discounts (e.g. 85%, 90%), but it’s very risky.

Why?

Because everyone always forgets about…

• Realtor fees

• Legal fees

• Holding costs (utilities, insurance)

• Staging costs (making it look nice)

• and all the other surprise costs along the way

Even if a property is discounted well below market value, if it has major renovations, you

may still want to move on to the next deal.

Why? Because major renovations are A LOT of work. And the costs for some

renovations, such as foundation work or work on older homes, can easily skyrocket past

your initial estimates.

Also, if the property is located in a bad area, you may have trouble selling the property

quickly enough to ensure you keep most of your profits. Remember… every month you

keep the property, you are losing money. If it takes 6 months to sell a property, you

could lose all your profits and more.

Do yourself a favour… stick to properties in decent areas that require only cosmetic or

moderate renovations.

if you found any of this info helpfull

please check the YES box below!!!

thanks!!!