Deal or No Deal #2?Posted on April 3, 2012 by
Never compare yourself with others. You never know what is going on behind the face. We will look at a person who has a job and likes what they do. They don’t plan on leaving their job and living off their investments. They will be able to buy through a realtor and pay a premium. I love to have these individuals in my wholesale stable.
The house is three bedroom/ two bath in a lower moderate income area (such as Mableton, Lakewood, Decatur, Norcross.) The price is $80,000, top of the market, with no equity. The buyer will pay 25% as a down payment. The interest rate is 5%. The principal balance is $60,000. The P& I payment will be approximately $322.09. Taxes will be $1000. Insurance will be $500. The payment for T&I is $125.00. The total payment is $447.09/ month. If the house rents for $825, the cash flow is $377.91 per month. This is great!!! Let’s look at the other side. It looks like 22.6% cash on cash return. (YES!)
The reality is that the property will need to be managed and repaired. Who is going to make the repairs? What about the vacancy rate? The vacancy rate needs to be low, 1 month per year. If there is a 10% factor for each one of these, the ROI (Return on Investment) drops to 15.8%. This beats the stock market hands down! In order for this deal to work it has to be move-in ready.
Does this deal work as an all cash deal? The ROI drops to 8.6%. Here is the big question: what is the business model? If the owner wants to get a higher rate of return than the bank, then this works. If the owner’s business model is to live off the investment this does not work.
Without a plan you will never know a good deal from a bad deal! The good news is that real estate may go down but it never turns to ZERO, unlike stocks and bonds. By taking the time to decide what your investment goals are you will be able to take your first step with confidence. You can use all of the best formulas in the world, but if you don’t have the pockets to weather the storm, then your successful investment career may get cut short.
One thing you can do to ensure success is to ask yourself these questions before you begin:
- How long am I going to hold the property?
- What is the rate of return I want on the cash invested?
- Who makes the repairs me or a tradesman?
- Who is going to manage it?
- What am I willing to do to get the dreams I have for my family and myself?
Write the answers down and put them away. Look at them often, especially when the market tanks and prices drop.