Why You Need to be a Deal Analyzer
The process of buying a used car is similar to buying a piece of real estate. When buying a used car, what are some of the questions you ask?
How many miles are on the car, has it been in any accidents, are there any special features, or why the owner is selling their car. How does this relate to real estate?
Well before making a purchase, you need some data, numbers, and facts about the car. It’s good sense to ask these questions to be sure that the vehicle will perform well for you while you’re driving it.
The same is true for buying real estate. Before you decide to invest, you have to analyze the deal to find out if it will produce income for you.
The Importance of Numbers When Investing in Real Estate
Real estate is all about the numbers. Everything from how much you’re willing to invest and the projected returns is dictated by numbers. It’s the backbone to any deal you’ll ever do.
If you don’t pay attention to the numbers, how do you know if you’ll make money from the deal or not? The point of investing in real estate is typically all about making money, and money itself is all numbers. When you are a real estate deal analyzer, you are able to look at many sides of the coin.
So if you want to be able to make money investing in real estate, you HAVE TO pay attention to all the numbers of the deal.
You have to know what you can buy it for, so by the time you want to sell, you’re going to make a profit. You also have to account for the renovations you want to put in, if there is any cash flow coming from the property, or if you have any holding expenses.
You have to look at the entirety of the deal and consider why you’re holding the project. Is it the result of a hasty decision that you realize now, isn’t bringing in any money? These are all things for any real estate you want to buy that you need to pay attention to.
It can be the difference between a well thought-out purchase with lots of potential and a property that will cost you money every month.
We’ve discussed the importance of analyzing a deal, but what does that even mean? Do you just drive to the property and walk around? Then based on what you see, decide if it’s worth your money?
Analyzing a deal is running the numbers on any given piece of real estate. Depending on what piece you’re buying, the analysis is a little different. For example, the process of analyzing an apartment building is different from that of mobile home parks. Just because they operate differently.
Fundamentally, it all boils down to:
- Purchase Price,
- Renovations,
- Holding Costs/Income,
- Disposition Price and the proceeds from that.
For any piece of real estate, it differs a little bit on how you go about analyzing those things. You need to know those numbers. Based on those numbers, you need to use a financial model to help you model those things out.
How to Effectively Analyze a Deal
Analyzing a deal implies that you have accurate data, or as accurate data as you can get. That data is essentially useless unless you have a financial model to help plug all those numbers in.
Both the data and the model have to be accurate, otherwise the result is just a bunch of random numbers. If you have an inaccurate model but accurate data, you’re not going to be successful.
You need accurate data. This data comes from reliable sources like brokers, sales comps, databases, appraisers, or general contractors. Essentially pick the sources or people that you can gather the most predictable data from.
After you collect all the data, you need to create a financial model where you can plug all those numbers in. The model helps you interpret the data to see if the project will be profitable.
If you read through the model and it is profitable, is it profitable enough to give the returns that you’re looking for? Is it enough to pay yourself, your investors, and any other parties involved?
Analyzing deals helps you invest in real estate profitably. Plain and simple. At its core, after all the research and gathering data, analyzing deals allows you to make a smart and profitable investment.
It enables you to prevent bad purchases and investments using the financial model you created. And if you pay attention to the numbers of every deal you do, it really helps you make consistently profitable investments in real estate.
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