The Down and Dirty: It’s All About the NumbersPosted on April 4, 2014 by
Here is a common problem in our industry: we find a property and we have to decide, is it deal or not a deal? Many people get hung up on this question, but you can’t let it paralyze you. You can’t worry so much that you lose out. (By the way, remind me to tell you the biker story.)
Here is the most important thing… you have to have solid information: comparables, equity, repairs, and rental rates (above $150,000 not necessary). Then you have to run the numbers. These two simple things will lead you to success in deciding if you have a deal or not.
Quick and Practical Advice on Deal Determination
- You can buy properties which are upside down IF the mortgage balance is more than what the property is worth.
- You can buy properties that have a tremendous amount of equity.
- You can buy properties with owner financing.
Now, ask yourself: What is my business model?
Remember: YOU are the most important person in this transaction. YOU have to control the real estate in order to get the desired result. What is your desired result? Is it cash flow? A chunk of cash? Creating wealth? Figuring out your exit strategy will be determined by your business model. Here are some considerations:
- Properties that are upside down are good for earning chunks of cash.
- Properties with a tremendous amount of equity are great for chunks of cash, cash flow, and creating wealth.
- Properties that are below $130,000 are used for rental properties.
- Properties above $150,000 are used for home owner occupants.
Deal or No Deal?
Consider these possible deals:
#1 is at 568 Spring Valley. It is a townhome in the Vinings: $172,000, four bedroom three bath with basement, one car garage, 2200 ft.². The owner is five months behind on monthly payments of $1,400. The property will rent for $1,700 per month.
It needs $5000 in painting/cleaning/repairs. The after repair value is $190,000.
Does the property have equity? Yes, but only 11% which is very tight. If something goes wrong, it will go wrong in a big way. The cash flow is low: only $300 per month.
Answer: If you are looking to stay in your current job and you like high risk, then this is a great property. In this case, you become a transactional coordinator and put a tenant-buyer into the property, allowing the seller to take the responsibility for rent and the tenant to do the maintenance.
#2 is at 123 Qassam St. It is a single family house, 2092 ft.², four-bedroom two and half baths, two car garage–the American dream. The seller owes $62,000. The after repair value is $85,000. The house needs $9000 in repairs. The monthly payment is $425. The rent in the area is $1100 per month. The seller is three months behind in payments for a total of $1,275.
Now, ask yourself, what are the numbers? What is your exit strategy? What is the equity? After the repairs, it is equal to 19.7%. The cash flow is $675 per month—much better than deal #1.
Answer: This is a perfect wholesale opportunity. This is a great buy, fix, and hold. This is a great deal because YOU have done the research and determined that the numbers are right.
In each one of these cases we look equity, repairs, and monthly payments.
Remember: YOUR purpose is to become financially free. To achieve this, you must understand your customers and your numbers.
Selling a property for 6% more than what the value of the market is what realtors do. Their customers will pay top of the market, maybe more. They like deals like example #1.
But YOU are an investor, and smart investors like yourself have rental properties and enjoy receiving rates of return above 10% like deal #2. Investors that do the buy-fix-and-sell enjoy a 30 to 40% discount from the after repair value.
When you find a property that needs repairs and in which the owner wants top of the market and cash, like property #1, the probability of a deal is very low. On the other hand, when the seller is willing to bring money to the table to get out from underneath the burden of a property, owes more than what the property is worth, or is behind on their payments, as in deal #2, the chances of you being able to structure a deal where you can wholesale it, receipt, cash flow, or earn cash increases dramatically.
Still need guidance? I would be happy to send you a form that you can complete and send back to me. I would be happy to evaluate it—at no charge—to determine the likelihood of success. Maybe I could add it to my portfolio, or we can both wholesale it.
If you want to see these deals and others, and how they were structured, then join me and other successful investors each and every month on the first Wednesday at my Creative Deal Structuring Subgroup in Atlanta. Let me coach you in learning the market and finding your niche. Heck, I might even tell you the biker story.