Thursday, April 25, 2013

Good To Know: Is It a Good Deal?

Last week on Good To Know, we discussed why invest in real estate, the pro's and con's. It will come to no surprise to find out, I'm in favour of investing in real estate; but only if the deal is good.

Duh! No rocket science there.

But how can you tell if it's a good deal or not. If you've ever played Cashflow 101 or 202, you will have practice analysing deals. I play both those games very often. When it's with someone who as never played before this is where they struggle the most with the game. They draw a card, read it over and although the words are clear, the concept isn't... yet. Is this a good deal?


I've pulled two Small Deals card from the Cashflow 101 game of a similar property. So which is the better deal? It as been my experience that someone who never played the game with no real estate investing background will automatically go for the bottom deal. Why? More cash flow! They will make more money. No brainer!

However, there are a few things to consider here that could affect the value of the deal. First thing I will look at is the ROI. ROI stands for Return On Investment. What is the return relative to the investment put into the deal.


To calculate the ROI you would take the income less the expenses and divide it by your contribution to the investment. On those sample card, the ROI is already provided, but lets go through the calculation just to make this a little more clear. The income and expenses is not provided on these sample, but we know the cash flow  which is the total of the income less expenses. The ROI is calculated on an annually basis so we will need to multiply the cash flow by twelve.

Example 1:   200 x 12 = 2,400      2,400 / 4,000 = 0.6 or 60%
 
Example 2:   400 x 12 = 4,800     4,800 / 12,000 = 0.4 or 40%
 
So the top deal has a higher ROI but the bottom deal still has a better monthly cash flow; why does ROI matter? Let's say you have $24,000 to invest and you could buy as many of these two deals. You could get two of the bottom deal cash flowing a grand total of $800 a month. If you invested instead on the top deal with the lower cash flow, you could purchase six of those properties for a cash flow grand total of $1,200.

Another thing I will look at is the resale value of the property, in these examples these two houses are worth the same, between $65,000 to $135,000 depending on the market. It is true that if you are purchasing this property with the intention of adding it to your portfolio as a long term investment, it may not be of crucial importance; but why not be in an advantageous position should the need to sell arise or if you wish to refinance at a later date in order to get equity out of the property?

Example 1: Resale profit potential is $19,000 to $89,000 (sale price - mortgage)
 
Example 2: Resale profit potential is $10,000 to $80,000 (sale price - mortgage)
 
Now if you have taken the same real estate courses as I have with Rich Dad Education, you know this like the back of you hand, but a refresher never hurts.

If you have not taken real estate investing courses, this information will be of great value so that when you have an investment opportunity presented to you, you will be able to determine whether or not it is a good deal. I will go into greater details on evaluating a deal on a later post. So follow this blog if you wish to know more.

In the mean time, practice evaluating deals. Play Cashflow, if you do not own the game and are not within driving distance so that you may come and play it with me; look for a Cashflow Club in your area. Yes, those exist. If that does not work, play the online version, Cashflow The Web Game.

 

Have fun!

Melanie