What makes an Investment a Good Deal? 

 

That's easy it all depends. What it depends on, is the investors investment objectives.

What really does determine what makes a good investment, entirely depends on what it is the investor is trying to achieve. The desired objective can and most likely will change often.

Sometimes an investor needs quick cash in which case they need to look for flip and quick turn opportunities. Other times, when you’re flush with cash from a couple flips, you want to invest in a long term, buy and hold type property. A property where long term capital appreciation and cash flow are the main objectives.

I have seen so many people over the years make the same mistakes over and over. That being they do not objectify the investment criteria. They get caught up in the emotion of the deal. When you’re making decisions based on emotions you only have your gut to tell you if something is right or not. Whereas when you first determine what your desired outcome is from any transaction, then it is easy to establish objective criteria against which you can measure each deal.

For example:

You come across a property that has good long term upside potential. It needs some minor cosmetic renovations but because the decorating is a little tired, you can pick it up for $15,000 below what the current fair market value would be if it was fixed up. The property is presently tenanted with long term tenants and is located in a good area.

If your looking for quick cash now the $15,000 below market value initially looks attractive until you start to realize the true cost to do even minor decorating improvements. Trust me, when your renovating a tired looking property $10,000 or $15,000 doesn't go very far anymore. The Tenants will be a force to be reckoned with. Do they have a lease and if so, will that tie your hands and prevent you from fixing and flipping the property quickly. You also have to factor in the costs that a lot of newbie investor don't consider. Things like legal costs, appraisal fees, land survey fees, loan points and application fees, holding cost while you fix and remarket the property, real estate commissions etc., etc., etc.. When you look at this deal objectively, if short term capital gain is what you are looking for, then this deal does not make sense based on your current objectives.

On the other hand, if long term capital gain, buy and hold is your investment objective then this might be right up your alley. The $15,000 discount makes for instant equity and the fact that it already has long term tenants is a bonus. If they are long term, there is obviously a reason for their staying there. They most likely like it there. If you assure them that just because the owners change doesn't mean they have to move they will most likely carry on as your tenants. In which case they will be paying down your mortgage and creating more and more equity for you each and every day.

So you see from the above example that what initially appears to be a good deal must be measured by what the investors objectives are.

Trust me, when you find a deal the temptation to jump on it can be very powerful. However you must remember to analyze your long term plan and see if this opportunity will take you to your objective quicker or will it slow you down in achieving your long range plans. The key is discipline and planning.

I have seen investors with grand plans get stuck after purchasing the first two or three deals because they bought a long term type investments instead of a flippers.

Most successful investors that I know, do a combination of the two methods. Initially they do a couple quick flips to rapidly increase their cash resources and then branch out into a long term investment here and there. They analyze where they are in their plan and decide what type of deal to look for from there.

Now it is important to note that with creative financing techniques, what might initially appear to be a bad investment when measured against the plan, can be made into a very attractive opportunity if the deal is structured in the right way.

Learn as much as you can about creative financing techniques, as this will open up many new opportunities.

If you have any questions or if you would like to discuss this further, please do not hesitate to call me at 204-667-SOLD (7653) or email to harry@harrylogan.com

I look forward to hearing from you soon.

Sincerely,

Harry Logan
Commercial Real Estate Sales and Leasing

RE/MAX executives realty