What separates good investors from those who struggle? Is it the amount of contacts they have, or their access to capital? Is it their knowledge of the business, or how many deals they may have closed? These are all important characteristics, but none are essential for being a good investor. The most important aspect of being a good investor is working on good deals. This sounds easy enough, but very few investors actually practice what they preach. Instead of only closing a handful of good deals a year, the average investor will waste their day working on mediocre deals that eat away at their time. If you want to be a good investor, you need to start working on good deals. Here are some pointers to get you going:
1. Look at the numbers: More often than not, you should be able to determine the strength of a deal just by looking at the numbers. The problem that many investors have is not trusting what they see. In their haste to close a transaction, they fudge the numbers to make the deal look more attractive than it really is. This could work to get you in the property, but it will only lead to more problems later down the road. It will immediately eat away at your budget, forcing you to list at a higher price than the market dictates. In doing so, the home will stay on the market longer than it should. The alternative is to take a conservative approach with all of the numbers.If the deal still looks attractive when you are done, you should move forward. If not, you need to have the discipline to move on to step two.
2. Know when to walk away: Good investors have the discipline to know when to walk away from a deal. In real estate, you are not judged by how many deals you close a year. It is far better to only purse a handful of quality deals than to get involved with every so-so deal that comes your way. There is nothing wrong with making a small profit from time to time, but you need to know when to pick and choose your battles. Some investors may argue that a few thousand dollars is not worth losing a deal over, but it isn’t that easy. When you get caught up in a bidding war, there is no telling where it will go. Once pride and ego get in the way, a few thousand dollars can quickly turn into a lot more. Some of the best deals you will get involved in are the ones that you walk away from.
3. Desirability: Not every new property is like a blank canvas. However, you can make changes that fit your market’s needs. There are those properties, however, where most of the selling factors are out of your control. There are times where you can’t do anything with the layout, or there is no space to add a bedroom. You can make the rest of the house sparkle, but it may not be enough to gain the appeal you are looking for. A good property is one that will retain or generate demand in any market. You may get a great deal on a property in an undesirable area, but what are you really getting? If the deal looks good, you need to examine why. Even the best contractor in the world can’t change the location.
4. Expenses: Before you get involved in any deal, you need to know what the expenses are. Experienced investors can take a look at a property and have a pretty good idea of what they will spend. However, not every investor is capable of doing so. You need to know all of the interest expenses, holding costs, closing costs, Realtor fees and much more. If your focus is on rehabs, you need to know that contractor is just giving their best estimates and not a final figure. Things can change on a dime with a property, and if you aren’t prepared for this you can quickly run out of money. There are a handful of hidden expenses on every transaction, regardless of the type of deal. To get the best deals, you need to know every one of them.
5. Multiple exit strategies: As much as we would like to believe it, not every deal will go as planned. The best investors recognize that they need to have a backup plan in place, or even two or three. Things happen on every transaction that are out of our control. You will find unexpected expenses on a rehab: The property might not sell for the price you anticipated, the project could take twice as long as you thought, the materials delivered aren’t quite what you expected. It is important that you prepare for whatever comes your way before it actually does.
Experience will help guide you along the way. If you are lacking experience, however, it is important to stick the fundamentals. Lean on these five principles for guidance.