How To Determine a Real Estate Deal

Evaluating an Investment

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A deal is not always what it seems in the investment world. By focusing on a handful of factors, even the most novice novice real estate investor can learn to recognize a good deal on property. In addition to a number of techniques tailored to secure financial success in the real estate market, starting with a genuine deal on a property greatly enhances investment opportunities. By evaluating a property’s potential appreciation, equity, leverage, and income generation, an investor can determine if he’s found a “diamond in the rough” or merely an average investment.

While all investors know that buying in the right place at the right time will yield profits, it’s difficult to predict the timing of real estate cycles. While purchasing for short-term appreciation might produce fast profits, it’s a risky endeavor. Examining neighborhood and city trends to find areas of steady, moderate growth is both safer and easier. A property with a 10-20 year appreciation range will prove a more sound investment overall and reduce the negative effects of an erratic market.

Equity in a prospective property can be enhanced in a number of ways. A property with a discounted price, inappropriate management, a potential for rezoning, or capability for improvement — as well as foreclosures in general — can have enough equity to consider it a deal. Buying into equity is often the best way to capitalize on a property; by finding a property owner who is willing sell for less than full value, an investor can often save a handsome sum. Just be sure to take the amount of work the property needs into account. A good rule of thumb is to only purchase properties that require 50 cents on the dollar or less in repairs (a property requiring $5,000 in work should be discounted $10,000 or more).

In simplest terms, leverage is an investor’s ability to control large sums in property with relatively little capital. Leverage functions much like appreciation in that relying on more predictable trends over longer periods of time can ultimately result in better investments than quick turn-arounds. In theory, the less cash put down on each property, the more properties that can be purchased. However, if the market suffers, investors who spread themselves too thin might not be able to recover from debt. Those who invest more conservatively, however, often manage to ride out the downturns in the market while still reaping the benefits of increased property values. Using common sense is usually an investors best bet — if it sounds too good to be true, it probably is.

A savvy real estate investor, especially one with multiple properties, must consider how much income a property can generate in comparison to other properties. Cash flow depends on whether the property is a single or multi-family dwelling as well as the down payment required, the interest rate on financing, and the strength of the rental market in that area. While some investors consider future equity growth of more importance than present income, some beginner investors must take cash flow into account. Similarly, the most inexpensive property is not always the best investment. The investor must consider all details of rental success before deciding on the best property.

The most important factor in real estate investing is to always have a “plan B.” No one can predict the behavior of the market, so it’s best to determine ideal properties through a combination of the factors mentioned above. If a property turns out not to appreciate in value, can it at least be rented and generate substantial income? Always try to think one step ahead. In time, finding a genuine deal will seem second-nature.

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