the-abcs-of-real-estate-investing-ken LifeFeeling

I use those five steps to come up with the initial cash flow for the property and arrive at
an offer price. To do that, we look at everything associated with expenses including our loan
payments and everything associated with income during our analysis. In the end we have a
solid picture of the bottom line for the property and are in a position to make our offer.
You’ll realize the importance of this process when you think of it this way. Would you
put your money into a mutual fund without looking at its past earnings performance? Would
you put your money in an annuity if you didn’t know the annual interest rate? Probably not.
Well, why invest in real estate without a reasonable estimate of what your return on
investment will be? In real estate investing, return on investment is also called “cash on
cash” and it is your net cash flow as a percentage of your down payment.
For instance, if you put $100,000 down on a property and it brings in $1,000 of income
per month, your cash on cash is 12 percent per year. Not bad. But if that same property
brought in $500 per month, your 6 percent return may not seem worth your time. As you
read on, you’ll see why it’s too early to make that judgment.
Furthermore, the process I will describe in this chapter will enable you to value property
without actually doing a physical inspection. You heard me correctly. In over 95 percent of
the offers we make, I do not visit the community before I complete the valuation and make
an offer. What could I really gain by doing a property visit that I couldn’t learn from the
seller at this point? If I personally visited every single property my company is considering,
we would be forever visiting properties and have no time left to actually purchase them. At
this stage, I rely on my team to fill in any gaps I may have in my knowledge about a
property.
Case in point, we just opened escrow last week on a 172-unit apartment building in
Glendale, Arizona. I had one of my team members visit the property while we reviewed the
numbers. The negotiation lasted about three weeks as we went back and forth on the offer
price. The figures we used for our evaluation came entirely from the seller and the broker
listing the property. Don’t misunderstand. I will not buy the property without walking each
and every unit, performing a thorough inspection, and verifying the numbers. I just let my
team do a lot of the preliminary screening for me.
Another property in the works right now is in San Diego. We’re in the second round of
negotiations and I have yet to actually visit the property. This shows the level of confidence I
have in my partners and my team members. They feel good about the property, so I feel good
about the property; I trust them implicitly on what could be a $66 million acquisition. My
point with these two stories is that offers are nothing more than an opportunity to look at the
numbers and make an educated guess about how a property will perform in terms of cash
flow, based on a brief, top-line evaluation. As you’ll see in a later chapter, you’ll find out
about the property in minute detail once you “tie up” the property by getting it under
contract. That’s when you begin the inspection period known as due diligence. But let’s not
get ahead of ourselves. Let’s take a look at the Five-Step Property Valuation. That will give
us the information that we need to say “go” or “no go” to a property investment.