Determining if a Deal is Good or Bad

Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Steve: Hi. This is Steve Rosenberg. I am the Owner and Co-Founder of Empire Industries Property Management Company located here in Houston, Texas. Today, I am proud to present the REI Classroom. And we’re going to talk about good deal versus bad deal. Should I buy this property or not?

Mike: This REI Classroom real estate lesson is sponsored by uglyopportunities.com.

Steve: So I have a lot of investors that will contact me, asking me if something is or is not a good deal, if they should move forward with that deal. And my first response to them is I have no idea if something is a good deal or a bad deal because I don’t know what you constitute a good deal. And the only way that you will know if something is a good deal is you have to write it out. Write out what your qualifications are of a good deal and what are your qualifications of a bad deal, meaning what will you accept, what will you not accept, and what is pie in the sky and what is an absolute no. So it’s kind of a wide spectrum and my advice originally would be to go off of the five pillars of real estate.

Those five pillars, the first is cash flow. Does the property cash flow, and is that a priority of yours? The next one would be equity capture, meaning what you’re buying it at, and what it’s worth. So what is the equity capture and what are your parameters of what you want the equity capture to be? The next thing would be appreciation. Are you buying something’s that going to appreciate very fast and rapidly? Or are you getting something that maybe is a slower appreciation? The next one would be debt pay down, meaning the tenant is going to be paying down that mortgage, or maybe you’re going to be negative cash flow, and it’s not going to pay the mortgage down very quickly. And lastly would be depreciation.

So based on those five pillars, you may want to determine what is the most important factor for you when you purchase properties. As an example, if you’re looking to buy a property and retire off of, and you have a good paying career job, you may not be as reliant upon a cash flow deal, you may be more reliant upon an equity or appreciation deal.

However, if you do not have a job, you may be more reliant upon a cash flow. So your certain situation is going to dictate whether or not that’s a good deal. And remember that those parameters could change with every deal that you purchase. So you may, down the road, would have different sets of parameters. There is what’s called negative geared, and then there’s what’s called positive geared. A negative geared property is something that may be negative cash flow, but it’s going to appreciate in a much rapid rate.

So there are certain areas in Houston in the midtown area that are very expensive properties that are going up in value very fast, but the cash flow on the property is going to be negative because you’re going to rent it for less than what your mortgage is. The opposite in the suburbs is going to be a positive geared, meaning you’re making positive cash flow, but the appreciation is much slower. So the answer is there’s no right answer, it just depends on what your business model is and what you are investing for.

Now, if something is a bad deal, there are red flags that you may want to look at that you’re going to encounter. For example, if the numbers do not fit your business plan, that could be a red flag to make that a bad deal. If you do inspections on the property and it’s a bad inspection or you’re getting bad information back, that could be a flag, and you say, “I’m pulling out and I’m not purchasing.” If for example, there’s an increasing crime rate or a bad school district, those are all leading indicators that down the road, you may have something different than what it is now. It could become a bad deal.

If you are in a flood district, that’s a big thing in Houston. There are different things going on. And if all of a sudden the economic drivers of the city or of that particular area are giving you indicators that it’s going to be a bad place to invest, look at the numbers and do not be emotional. Just look at the numbers and let the numbers dictate the deal and let the indicators of the red flags tell you whether or not you should move forward or not. So I hope this helps you. This is Steve Rosenberg with Empire Industries in Houston, Texas. Thank you very much.

Mike: HomeVestors, the “We Buy Ugly Houses” folks, is a franchised system of hundreds of real estate investors that have purchased over 65,000 houses. If you’d like to learn more about the most powerful real estate investing system in existence, whether you’re a pro looking to take your business to the next level or whether you have no experience at all, but a burning passion to be successful in real estate investing, please visit flipnerd.com/ugly to learn more.

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