Real estate investing is about making deals that involve many moving parts (sellers, the money, contractors, investors, renters, property managers – just to name a few) and it can be risky and time-consuming if any of these moving parts fail. It can become even more challenging when you're traveling the world and not sitting at a desk in an office all day long.
Here is how I continue to make successful deals, even while traveling the world. (Hint: That's what DM and DN stand for!)
All of my deals must pass the following 4-point checklist in order for me to invest in them.
Investing Checklist Point #1. Is there a potential for a return on investment (ROI)?
This one seems like a "no brainer" but many brand new real estate investors fail to fully appreciate the costs (of money and time) that go into doing a deal.
To calculate your return, you need to consider all the benefits and all of the expenses (even if they aren't specifically expressed as dollar figures). For example, I won’t do deals that will suck up so much of my time and energy that I am not able to travel the world. Even deals that look like they have good ROI from a financial perspective don't actually offer a positive ROI for me if they keep me from living out my dream of travel.
First I'll show you the calculation then I'll give you an example.
The basic way to figure the ROI is with the following formula:
- Determine the monthly net income (after expenses) on the property
- Multiply by 12 to get the annual net income
- Divide by the amount of cash you personally have in the deal
- Multiply by 100 to get a percentage
Now let's look at a real example of a deal I've done (pictured below). I'll give you the important numbers (just below the photo) and then I'll plug them into the formula so you can see how I calculated the potential ROI.
Here are the important numbers we'll need to calculate ROI...
- Money in to do deal: $42,900
- Total purchase price: $102,900
- Owner financing: $65,000 Interest Free Loan
- Monthly rent collected: $3,900
- Monthly expenses: $2,900
Now let's plug these numbers into the formula I gave earlier in the blog post:
- Determine the monthly net income (after expenses) on the property: $1,500
- Multiply by 12 to get the annual net income: $18,000
- Divide by the amount of cash you personally have in the deal ($42,900): 0.4195
- Then multiply by 100 to get a percentage: 41.95%
Therefore, this deal offers 41.95% Cash on Cash ROI.
Note: This doesn’t include increasing rents over the next couple of years or any principal reduction at all. This is a FAST and simple way to determine what the ROI is and if you are off 5% either way you are still doing pretty good.
Here's the great news about this deal: The deal has nearly paid you all of your money back in the first 2 years.
But some of you might be saying: "Hey DM, I don't have $42,900 sitting around to do a deal like this so how is this example helpful to me?" Well, you might be surprised to learn that this deal was done with Zero Credit and Zero Cash. (Stay tuned. in another blog post, I'll show you how it's possible!)
So always make sure that your deals have a return on investment for you. ROI is so important to all real estate deals. Expect to read more about this topic from me in the future! Plus, I'll be giving you examples of other deals I've done and show you the exact numbers in my calculations. Check back soon.
Investing Checklist Point #2. Is there cash potential?
I believe that you should try to get cash three times in every deal. I call it the "Trifecta of Profits":
- Cash Up-Front
- Cash Flow
- Trailing Cash
Not sure what these mean? Stay tuned, I'll show you in an upcoming blog post that exactly details what the Trifecta of Profits is all about and how to get it on your real estate investing deals! I'm going to reveal in some upcoming blogs exactly how I achieve these on nearly every property I invest in... and you can use the same exact technique for your business even while I'm lying in a hammock on beach in Aruba, listening to the ocean surf crash against the shore.
Investing Checklist Point #3. Is there an opportunity to add value?
All successful businesses add value in order to make money. As a real estate investor, I add value by helping motivated sellers get out of their home, I help private investors get a better return on their money, I help the community when I buy the property (by paying the taxes and increasing the value of the neighbors' homes).
Note: Some investors add value by rehabbing homes but I prefer the easier, faster way of real estate investing (with fewer headaches and hassles) by investing in turnkey deals. I'll show you exactly how to get turnkey deals!
Investing Checklist Point #4. Does the path make sense?
A real estate investment is a process and you need to know exactly where you'll get your return from and how you generate that money. While the terms and concepts of "strategy" and "exit strategy" can sound very formal and can even scare off inexperienced real estate investors, these concepts are important to ensure that you approach your deal in the right way and that you have a plan to make money on it. Here's a brief overview of my strategy and exit strategy compared to other real estate investing strategies:
I prefer cash flowing properties because there are many opportunities and cash flow gives you a solid, predictable income every month. Compare that to buying and then selling at a higher price – the appreciation you hope for is too much of a gamble, in my opinion. Many home owners and appreciation-focused investors were hurt when the economy collapsed a couple of years ago and home prices plummeted.
I prefer to control the investment and predict the income, and I believe the best way to do that is with cash flowing properties. There are plenty of cash flowing deals out there! (In a future blog post, I'll show you exactly where to find them yourself!)
Using this simple checklist, my team sends me investment deals every week and I can evaluate them from wherever I happen to be then send back the necessary "go" or "no-go" decision on whether or not to pursue an investment.
Check back again soon because my next blog will describe the one essential ingredient you absolutely must have if you want to start a successful real estate investing company (and when real estate investors fail, it's often because of this missing ingredient!)
It's not money.
It's not properties.
I think you'll be surprised at what it is!
Signing out from Palm Beach, Florida
Your Friend and Mentor,
Mark Evans DM,DN