Over the years, our team has been involved in hundreds of real estate investment transactions. We have found that there are two parts to every successful purchase, buying right and cash flow.  

BUYING RIGHT 

The key of buying right is to understand the difference between the “After Improved Value” and the “Acquisition Cost”.  The “After Improved Value” is the retail value a homebuyer will pay for the finished product. This value can be determined by finding comparable sold properties and comparable pending sales. The “Acquisition Cost” includes the property's purchase price plus the cost of construction or renovation. If the cost of acquisition is less than the after improved value there is a potential for profit.    Condition of the property is important to the overall plan. A property in poor condition could be a great opportunity, especially if the purchase price plus the cost of renovation or construction is less than the after improved value. Two other factors that impact an investment transaction are location and terms. 

IMPORTANCE OF LOCATION 

The property’s location determines potential market appeal. It also determines the potential and quality of any rental income. Our property teams have developed a neighborhood rating system based on the following criteria: 

• Crime statistics
• Quality of schools
• Condition of property
• Proximity to major employment
• Affordability
• Special features
• Negative features

From analyzing these seven factors, we have developed a neighborhood rating system: 

1)   Highest Rated

2)   Above Average

3)   Average

4)   Below Average

5)   Lowest Rated. 

IMPORTANCE OF TERMS 

Terms could be more important than price. A good real estate investment will not deplete cash reserves and provide for a great return on investment. Also, sometimes, small cash investments provide the greatest return. For example: A duplex is listed for $200,000. After expenses, the property generates a net rent of $1500 per month. One offer comes in at $190,000 cash. Another offer is higher, but asks for the following terms: Sales price of $205,000 10% down or $20,500 The rest of the funds for the purchase will come from a bank loan with the following terms: 

• 30 year fixed rate loan
• 5% interest rate
• $991 monthly payment

Which is the better deal for both the investor and the property seller?  With a higher offer price, a buyer could negotiate seller paid closing costs, property repairs or other concessions. In this case, a larger return on investment comes from lowering the cash due at signing. Let's look at the math: Purchase with a one time $190,000 cash payment. The entire amount is at risk and is tied up until the property is sold or refinanced. 

• $1,500 net rents (since this is a cash transaction, there is no mortgage to subtract)
• $1,500 net rent times 12 equals $18,000
• $18,000 divided by $190,000 equals 9.5%  return on investment

  Purchase with a $205,000 price with a 10% down. $20,500 down payment is at risk and tied up until the property is sold or refinanced.  

• $1,500 net rent minus $991 mortgage payment equals $509
• $509 times 12 equals $6,108
• $6,108 divided by $20,500 equals 29.8% return on investment