Shut up, I’m not even kidding.
Do you know how many people approach me and ask me what I think of a particular deal? Mind you, I’m a very open-minded person. Even if a deal isn’t one I would necessarily pursue personally, either for interest or niche reasons, I’m always open and eager to hear about deals other people find. I’m especially excited if a deal seems really good and the person goes after it (I get really excited for people going after killer deals — and even more if they actually get them!).
Of all those people who approach me wanting to hear my opinion on deals, do you know how many have absolutely zero clue what the anticipated profit on the property will be? Uhhhhh, hello! What do you think we are in this biz for? Profit. Don’t you want to know what your profit on a property will be?
More logistically, how are you (or me) supposed to know if a deal is a good one if you have no idea what the profit is scheduled to be?
I have three case studies to help show my point. In each case, figure out what information is missing in order to determine if it’s a good deal or not. Not only look for the missing information, but also look for red flags in each deal.
Single-family home, Orange County, CA
- Not a full fixer-upper, but needs extensive updating and cosmetic work
- Income: $1200/month
- Expenses (property taxes, insurance, repairs): Unknown
- It’s Orange County, CA. Enough said. Amazing place to own anything (assuming you can afford it)!
- Potential for appreciation in Southern California is high.
- No profit! None of the expenses associated with this property are known. But in this case, the taxes, insurance and repairs don’t have to be known to already know you will lose money on this property. The mortgage payment on this property alone is likely to be right at the rental income or higher depending on the terms. Boom, negative cash flow.
What if you pay all cash for the property, you ask. Well, then calculate the cap rate on that. Taking into account NO expenses, you will be looking at a 5% cap rate. But no expenses isn’t realistic at all. You will have to pay taxes, insurance, repairs and vacancy. And this house needs extensive updating to even make it rentable. All of that will no doubt put you in the red on this property.