What is a Good Deal?

Real estate is similar to any other type of investment. There is an essential investment amount (down payment, purchase price of the home,) a return on investment (cash flow from rent, tax saving and/or appreciation) and risk (market risk, trend analysis) involved. Your objective is to maximize your return on investment while minimizing the risk. Below are some good general guidelines for determining a good real estate deal.

10-10-10 Rule

Never put more than 10% down on a property. Tie up as many properties as you can with the lowest investment possible. Never finance or assume a loan with an interest rate over 10%. The interest can kill you in the long term. Always require a minimum of a 10% discount off the fair market value, not the listing price. Fair Market Value (FMV) is the price that comparable homes are actually selling for in the community today.

Positive Cash Flow

If you invest in rental properties, be sure the cash flow per year returns at least 20% after mortgage, interest, tax payment and other homeowner expense (i.e. maintenance, repairs, utilities and homeowner association dues.) Otherwise you should consider a straight investment in another financial vehicle.

The 60% Rule

Look for property you can acquire at 50-60% of FMV. If you get a better discount, thats great. But at least you will know that if you buy it at 50-60% of FMV, you will most likely be able to turn it around fast at 90%. Quick turnaround time on your investments is important, especially in the beginning when you may be cash poor and cannot afford to hold on to the property for too long.

Other Elements of a Good Deal

1. * A first mortgage and any other mortgages that are assumable/no qualiying(FHA or VA) or private mortgages (old or new seller take back). If mortgage is not assumable, anticipate a greater discount.
2. * A property in good condition, ready to rent (move-in condition). If the property is not in good condition, deduct three months rent and the fix-up costs from the purchase price.
3. * Property in long resell markets. Discount the price 10% for every 4 months of resell.
4. * Property that produces a positive cash flow. The rent must cover PITI (principal, interest, taxes and insurance) and maintenance. The remaining cash should be a 20% yeild on cash down, otherwise the price must be lowered.