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What Really Makes A Good Real Estate Investment Deal?

Aug 17, 2007
Learning the technique to make a good real estate investment is not a difficult task, but you need to realize why success remains elusive to some investors only? Are there any trade secrets? Or is there any technique? Often some real estate investors focus on methods and they lose sight of some important issues. Research, education and experience guide you towards recognizing a good deal. There is a simple acronym C.L.E.A.R. that can be used as a formula to differentiate between a good and bad deal.

Now lets define and understand the concept:

Cash flow: Before dealing in a property, think about whether the property can get you the desired cash flow. Cash flow depends on many factors such as the strength of the local rental market, the finance interest rate and how much of down payment you are investing. It also depends on whether the property is multi family dwelling or single-family dwelling. You need to also know how to compare the cash flow of the property with other potential properties. For example, a house worth $150,000 rents for $1,000/month and has better income potential than a house worth $300,000 that rents for $1,600/month.

Leverage: This is an important point for investors because the less they invest in one property, the more cash they have to invest in other properties. If the rate rises, then the rate of returns also goes up. But if the property rate goes down, then the cash loss has to be dealt with. Since real estate market is cyclical, a negative cash flow is generally short term and this problem can be handled only if you have another source of income. Nothing down is an attractive investment approach for the high leverage investor, but this kind of deal should be approached with care.

Equity: Before purchasing a property, check whether the property has any equity and be aware that equity takes a number of forms such as:

. A discounted rate
. A potential fixer upper
. A poorly managed property
. A foreclosure

Buying a property with equity is a safe bet. Find a motivated seller who is willing to give up his equity for less value. Or, buy a property that needs work to be done for lesser value.

Appreciation: Buying a property in a good neighborhood is always the right investment deal and it will result in appreciation and profit. However, timing a real estate cycle is very difficult and speculative. If you invest in a property without equity and cash flow for a short term, then it is a very risky investment.

Reach out in time, on target: Buying a property for a moderate period is considered safer, as the property value always appreciates and while selecting areas look at long term neighborhoods and citywide trends, where the value will increase by 5% to 7%.

If you buy a property having adjustable loan rate and the loan rates increase, then you will be out of business soon. So while investing, expect the best but be prepared for the worst. And always remember to analyze the property before investing by thinking C.L.E.A.R.
About the Author
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