Are you ready to buy a rental property but scared of making a bad deal?

It’s in our human nature to want to get a good deal.

As humans, it’s like we are programmed to find coupons, search online for promo codes or hit the stores when there’s a major sale going on.

Look at Black Friday.

Thousands of people line up hours ahead to get the best deal on electronics, toys and great gifts for the upcoming holidays.

Just as much as we all love to get a good deal when we are shopping, on the contrary, it kills us inside when we walk into a store or get that coupon in our email and we stop dead in our tracks.

And we think…I just bought this thing and now it’s even cheaper.

Dang..I thought I got a good deal on this, but now there’s a better one.

For many of us, we hate feeling like we missed an even better deal.

And while this post isn’t about shopping on black Friday or really even shopping at all…

The mentality that we all have when it comes to getting a ‘good deal’ plays a big role in the rental property investing space.

And could be the reason you haven’t bought that first property yet.

Because you’re looking for that ‘great deal’ and feel like you haven’t found it yet.

or…

You’re just scared out of your mind to make a bad deal and lose money.

Most rookie investors subscribe to one of those feelings and often times both will come creeping into a newbie investors thoughts.

And the hunt for that property and financial independence comes to a screeching halt.

 

Truth #1

But here’s a truth that should put to rest these fears that keep popping up and keep you moving toward that dream of financial freedom.

 

Getting a ‘good deal’ on a rental property is actually pretty simple.

 

Truth #2

The idea of getting a ‘good deal’ is truly arbitrary. Because what is a good deal to one person might not be a good deal to another.

 

It’s all based off of the investing goals that you set up in the beginning of your investing journey.

 

So, I’m here to break down this idea of getting a good deal and to show you just how simple it actually is.

 

Let’s begin with…

 

Setting Goals as an Investor

Before you even begin down this windy and sometimes turbulent road of real estate investing, you need to sit back and figure out what you’re trying to accomplish.

I use to share this same example with my students (I was an English teacher) when I was teaching them how to write an essay that was congruent and contained flow.

Not that long ago smart phones didn’t exist.  And if we wanted to go somewhere we couldn’t just get in the car and go and plug an address in on the way.  If we left our homes without printing out directions from MapQuest, we most assuredly would get lost along the way.  And it would take us that much longer to get to our destination and we would get frustrated, mad and maybe even want to turn around and go home before we ever got where we were going.

 

If you haven’t seen the connection to real estate investing….let me share it with you….

If you start down this investing path without taking time to sit back and decide what type of investor you want to be…

 

You will most certainly get lost along the way.  Just like many of us used to when we forgot to print out directions from MapQuest.

You will get mad.

You will get overwhelmed.

You will get lost.

And you’ll want to quit.

So before you jump in the car without directions…take some time to sit down and ask yourself some of these questions.

  1. What type of property do I want to invest in? (single family homes, condos, student rentals, multi-family, etc.)
  2. What kind of return on investment (ROI) am I looking to earn on my investment?
  3. What is the quality of the properties that I’m planning to build my portfolio with?
  4. Do I want to self-manage the properties or hire property management?

 

I could go on with many more questions, but I believe you get the picture.

If you just start buying properties without any direction or goal….you’ll take the long way to reaching your financial goals.

Once you’ve set some goals, now you can start shopping.

#2 Finding a Property

Once you’ve determined the type of investor you are, what kinds of properties you want to invest in and what type of return (ROI) you’re looking to earn finding a property becomes a bit easier.

With setting these parameters for yourself as an investor, you have a focus when it comes to looking for property.

So you don’t waste your time.

 

It’s just a matter of putting the time and effort into looking online, driving around your neighborhood and letting your real estate agent know what you want to get the ball rolling.

(While I could spend forever on this topic of finding properties, I want to get to the main focus of this article….analyzing properties.  IF you’re looking for more on finding properties click here.)

 

#3 Running the Numbers

Most novice investors get really nervous at this stage of the game.

They’ve set their goals and found what seems like a good deal on a potential property…

..but then it comes to actually running the numbers.

And the fear really sets in.

Because you are the one who is analyzing the deal and is at fault if something goes wrong.

For many people, that fear of failure or making a bad deal is enough to push them out of the real estate investing game.

But the truth is…if you know what numbers to look for and a reputable spreadsheet or calculator to run them…

Then you don’t have to be scared.

I say that now with 100% confidence, but I’d be lying if I said I’ve always felt like that.

When we got started I didn’t even know what ROI (return on investment) meant.

So I was pretty scared.

But I didn’t let that stop me from moving forward.

Truth be told…

I now truly appreciate the logical nature of ‘running the numbers’ on potential deals coming from a background as an English teacher,

 

It’s cut and dry…black and white.

There really isn’t much gray area.

When I was an English teacher, I lived in the gray area 99.9% of the time with my students.

 

So it’s refreshing to me to look at analyzing potential deals as simply as…

Find a property…

…run the numbers….

….decision made.

As an investor, there’s really no emotion involved in the process.

The numbers will make the decision for you.

Not you or your emotional connection to the property.

Hands down, this is probably the hardest thing for rookie investors to do.

Take out the emotion and let the numbers make the decision for you.

Trust me…

…If you can make that switch in your mind when you get started, then you most likely will set yourself up in a better financial position.

 

Truth #3

When you analyze a potential deal you should know whether this property will make you money or not.  It shouldn’t be a mystery or a guess.

It should be calculated.  It should be strategic.

 

When you run your numbers correctly and even allow room in your returns for unforeseen events to occasionally occur, you will set yourself up for success in this field of investing.

If the numbers don’t work when you buy…then you should beware.

Don’t buy under the assumption that, well the numbers don’t work now…

…but maybe they’ll work later.

If this is the case….walk away.

 

Before we jump into looking at actually example of analyzing deals, let’s take a look at the actual numbers you need to know.

When running an analysis on a property there are a number of things that you need to include.  When we run initial numbers on a property we use our quick and easy Property Analyzer, to allow us to see if a property could potentially work. (Click here to get our analyzer for free)

  • purchase price
  • taxes
  • insurance
  • interest rate
  • closing costs
  • vacancy rate
  • HOA/Condo fees
  • Utilities
  • Lawn care/Snow removal
  • Property Management
  • initial rehab costs
  • Capital Expenditures
  • Gross monthly rental income

 

 

These are the numbers that you are going to make sure you find out from an agent or seller when you are running the numbers.  Leaving any of these out can potentially lead you into making a bad deal.

As an investor, you want to be as thorough as possible when it comes to gathering numerical information about a potential property.

Because think about it….it’s your money you’re putting into it.

Your money…your risk.

So do your due diligence in finding as many of these numbers as possible.

Alright, let’s jump right into the main focus….

Analyzing Rental Property For Potential Profit 

Don’t be a fool.

It goes a lot deeper than just looking at monthly rent vs. the PITI (principal, interest, taxes and insurance).

Many rookies make the mistake of not accounting for all of the necessary expenses that can show up with an investment property. It’s important to take into consideration the fact that the property may be vacant for a short period of time during the year or that it may need some initial rehab work to fix anything that needs to attended to.

All of these numbers play into the overall analysis of your return on investment.

If you skip any of these numbers, then your analysis can be inaccurate giving you a false reality of what your return may look like.

Once we know whether a property is worth pursuing, then we can run a deeper analysis that takes into account things like depreciation, mortgage interest deductions, etc.

Knowing that analyzing deals can be intimidating for a rookie investors, let’s take a look at some actual examples of real properties with real numbers to help you see what makes a good deal.

 

Get Our Free Property Analyzer

 

 

Quick Insights on the Following Deals:

In this quick analysis of the deal, the ROI number we calculated was a quick, raw estimate.  It did not take into consideration depreciation, mortgage interest reduction or applicable tax bracket deductions.  These are quick cash on cash return analysis to see if the property meets our ROI standard.

If it does meet our percentage then we will consider pursuing the property further i.e. scheduling a showing, gathering more accurate information and records from the listing agent and running a more thorough property analysis that considers the aforementioned things.

If the quick analysis doesn't meet our ROI goals, then we quickly trash it and move on to the next potential deal.

It's that simple.

Deal #1:  The Lower Purchase Price Isn't Always a Better Deal

Before we jump into the numbers, let’s take a minute to talk about some of the other important information surrounding this property.

Property Type: Single Family Home (Ranch Style)

3 Bedrooms/1Bath

This property is located in a town of about 15,000 people located one hour west of Pittsburgh, PA.  It is located within one of the strongest school districts around the area.  Many individuals who live in this area are employed by the local hospital, school districts, the university, coal mining, oil and gas industry or other local small businesses.

 

Here are the basic numbers of the property:

Listing Price: $99,900

Target Acquisition Price: $91,500

 

After including all of the necessary numbers in the analysis, when you look at the numbers on the property analyzer you see that there is about a 6% return on investment for this property in this particular town.

This is well below our ROI standard and therefore, after quickly analyzing the deal we would not pursue this any further.

However, at first glance, one may see this property and the list price as a “deal”.  The reality is that you have to know the numbers for both the sale of property and the renting of property in a town to really determine a good deal or not.

Because rental amounts tap out at around $800 in this particular town (unless it’s a student rental) and the taxes are extremely high (due to a recent tax reassessment) in order for numbers to work on a rental, you need to get a property for a considerably low price. Well below the target acquisition price of this property we listed above.

Again, this goes back to the importance of really learning about a community that you are investing in.  Making a solid investment with a good, predictable return forces investors to know more than just how to calculate a ROI.

 

Deal #2

Property Type: Townhouse

2 Bedrooms/1Bath

This property is located in a town of about 2,500 people located one and a half hours north west of Washington, DC.  It is located right off of a major interstate highway and just a few miles from a university, hospital system, and manufacturing companies.  Many who live in this town and neighboring areas commute to DC for work.

Here are the basic numbers of the property:

Listing Price: $109,900

Target Acquisition Price: $101,500

 

While this property would have cost just a little bit more than Deal #1 at the target acquisition price (10k difference) the return on investment (ROI) was substantially higher in Deal #2.  In Deal #2 the taxes were 1/4 of the amount of the taxes from Deal #1 ($2,520—$585.90) and the rental amounts that you could demand in the towns differed from $750 to $950.

Analyzing rental property

I chose to use these two deals from these two towns because these are towns that we invest in and know very, very well.  We’ve put the time in to learning about these communities and what draws people to live there, what they’re willing to pay and where an acquisition price needs to be in order for the property to work.

As a result, if we were choosing between these two deals, we would ultimately choose Deal #2 because of the ROI, despite it being a higher purchase price.

Again, understanding how to run a cash on cash ROI is critical to your success as an investor, but learning as much as you can about the community is equally as important to making solid investments that yield a predictable and repeatable return year after year.

 

The Moral Of the Story

Analyzing deals isn't as difficult or scary as it may seem.

When you know what numbers to look for and how to run them (with a spreadsheet or calculator) you can quickly know whether or not a property is a potential deal for you and your investing goals.

You don't have to spend hours deciding.

Remember, it's as simple as

...find a potential property

...run the numbers

...decision made

Don't let the fear of failure or fear of making a bad deal hold you back from pursuing your financial freedom.  In the game of real estate investing...

...the risk is worth the reward.

 

 

 

A step-by-step blueprint you can use to find good deals on potential rental properties and start earning cash flow each month.

The Blueprint to Finding GOOD DEALS on Potential Rentals

2 Comments

  • Brian - Rental Mindset

    Reply Reply January 24, 2017

    I love that you are putting out some article again in addition to the podcast. It is great to see the numbers on the page sometimes.

    One thing you’ll quickly learn as an investor who goes through this a couple times, you will get a rule of thumb to quickly let you know if an investment is even in the right ballpark. Meaning you don’t have to calculate every single number when you immediately know it isn’t going to work.

    • Emily

      Reply Reply February 7, 2017

      Thanks Brian! I agree…sometimes when it comes to talking about numbers it’s nice to see it on paper.

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