How do I know it’s a deal?
In today’s real estate market most new investors have the hardest time trying to determine if a specific property is really a good opportunity. In essence, they have paralysis of analysis and lack the courage to pull the trigger and buy something. It’s no wonder. With all the conflicting media reports on the real estate market, gold, stocks, inflation and deflation – it’s tough! Unless you shut out the noise! If you believe everything you read and see on the television, then you are over-trusting of journalists and the government. You have to use common sense and logic to decipher what is really going on. But don’t try to understand it – shut it off!
Every politician has their own point of view and will do everything they can to persuade you to believe what they believe. The government controls much of what you read and watch on TV. Just today in an Atlanta newspaper I read how the Federal Government lied about the serious impact of the oil spill in the Gulf of Mexico. Should we be surprised? Heck no, they lie about employment statistics and manipulate financial markets. Ignore it. Ignore the news and curl up in your world of common sense and make a decision to do something – anything – just make a decision.
Here’s what I’m talking about:
I’ve been around the monopoly game of real estate for over 30 years. We have cycles in real estate just like we have cycles in all aspects of business and the economy. At this point in time, we have the greatest buying opportunity of a lifetime, but if you sit on the sidelines much longer you will miss it!
But how can I tell if a property is a good deal or if the price will continue to fall? First, let me state that real estate is local in nature. That is, each real estate market is different as there are many variables that impact price in states, cities, and towns right down to the neighborhoods. You really want to buy where prices have the greatest chance of going back up in the not so distant future. You make your money where you buy based on cash-on-cash rate of return and anticipated future sales price. Here is the best indicator that I use in today’s market. It’s not the only one, but it sure give me a warm and fuzzy feeling with the confidence to sign on the dotted line.
Here it is:
Look at what the house sold prior real estate bubble and again what it sold for during the real estate bubble. For example, recently I was evaluating a house that sold for $160,000 in 2007. To remind you, 2005-2007 were the prime bubble years in most markets across the United States. This same property sold for $120,000 in 2003 – that was pre-bubble. I believe that we will get back to pre-bubble prices in approximately 5-7 years, maybe sooner. So, when I can acquire this property for $55,000, I feel confident I made a great purchase. The same property will rent for $900 – $1,150 per month. I will have a lease/option buyer in place for $120,000 – $140,000. The reason for the range of rent and lease/option purchase price is because these are negotiable items with a perspective applicant. You can afford to be fussy over who you let into your houses and who you let into your life for that matter. That same house with the land and impact fees would cost over $100,000 to build in today’s market.
So who cares about the price of gold or what President Obama ate for dinner. You can’t solve the tragedies of the world, and reading about them won’t make you a dime. Turn off the TV and throw out the newspaper. It’s a waste of time, a drag on your mind, and prevents you from taking action to take care of your financial future. Get your financial world in shape and let the rest of the world take care of itself. This is the greatest buying opportunity of a lifetime and you could be setting yourself up to retire on rentals, if and only if you take action.