It’s human nature to only want to do “great” property deals. However, as I’ve mentioned before, there is a danger of getting side-tracked into trying to only do the “perfect” deal. But what constitutes a perfect deal and how can we identify a great deal over a poor deal?
It probably won’t surprise you to learn that the “perfect deal” doesn’t actually exist, and yet many investors or “would-be” investors fail to recognise a good or excellent deal when on the quest for perfection. In my opinion, a better goal is to do a great deal and to forget all about the perfect deal.
To some extent a “great deal” will depend upon why we want to be in property in the first place and what our goals are with respect to property investing. We all have different aims and aspirations and although there is no single answer to this question, in my mind, there are six essential prerequisites that fall within the definition of “great”.
They are as follows:
- The ability to create positive cash flow
When our cash flow is positive, we can withstand most things that the market throws our way. Thus, by choosing a property that has the ability to maintain a positive cash flow, you can feel safe in the knowledge that this deal can work towards yielding a positive return.
However, if you do find a deal that in all other respects fits the bill except that the property has a negative cash flow, don’t discount it immediately. Take a look at why the cash flow is negative and whether anything can be done to make it positive. Perhaps the property is ‘under rented’? Perhaps the management fee is uncompetitive? Or perhaps with a few minor and relatively cheap improvements, the rent could be significantly increased? Either way, ensure that cash flow is factored into the deal and assess what adjustments could be made to help this deal work better for you.
- The ability to boost your equity and net worth from day one
We are often told that the profit is made on the purchase and if you buy below market value, you’ll boost your equity and net worth from day one. As such, buying BMV is number two on my list.
However, as with all of these prerequisites, I advise not being too rigid. For example, there may be times when the vendor won’t concede on price but you still know that the property is worth buying. Perhaps there is significant anticipated capital growth, and this may not necessarily be due to changes in the market; instead there may be planned changes in the locality which will work to increase value. As such, keep your opinions open and conduct thorough due diligence.
- The prospect of significant capital growth
As above, buying in an area where there is a significant prospect for capital growth. There are two ways of looking at this. The first is that under normal market conditions, some locations will always be more popular than others, and in those locations we can assume that prices will rise faster than in the locations which are less popular.
However, the icing on the cake is to buy in a location where you can not only expect significant capital growth due to natural market forces, but where you know, or anticipate, the capital growth will be further enhanced by non-market factors which are peculiar to that location. This could be a major employer moving to an area or a major regeneration scheme, or it could be due to improvements in transport links or other infrastructure, etc.
- The ability to complete the deal with a great finance package
Having the right finance package can make a good deal great. The converse can also be true that having the wrong finance package can make a great deal poor. Investors tend to concentrate on the headline interest rate but the overall cost can be significantly distorted by upfront fees, redemption penalties… and so on. These need to be checked and taken into account so you know you are comparing like with like.
To tie the deal in with a great finance deal, I would always advise using a reputable mortgage broker. Not only will he/she know what’s available and which product will suit a particular deal and particular borrower’s circumstance, but a broker will have the in-depth specialist knowledge needed to make a good deal great. In my opinion, a broker is more than worth his/her fee.
- The ability to buy or control a property using as little of your own money as possible
Otherwise known as Nothing Down. The premise behind nothing down is that the purchaser will put “none of their own money into the deal”. In theory this makes property investing accessible to everyone, and if you do have money which you could put into a deal, you have the opportunity and freedom to spend it in other ways instead.
This strategy has led investors to be more creative about how they do things. Not putting your own money in means, by implication, putting somebody else’s money in (unless, of course, you use an option or similar technique). We will go into Nothing Down deals and options again in the coming weeks.
- The ability to add value
The final element of a great deal is the opportunity to add value. An obvious example of this is buying a property which requires renovation. If you buy the right property, at the right price, requiring the right renovation and improvement works, there will be an opportunity to increase the value by more than you spend on the works. The reason for this is that the market is imperfect in the way that it treats the cost of repairs and improvements when establishing the value. As I have said many times before, in property cost does not equal value.
So these are the six things that I look for to create a great deal. Admittedly, it’s unlikely that you’ll be able to buy property with all six and there may be good reasons for buying properties which don’t have all six. But as you become more experienced in your method of investing, in your location, you may come to the conclusion that four out of the six, or even three out of the six is good enough. Quite simply, weigh up what is important to you and what works towards achieving your goals.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor
PS. By the way, I’ve rewritten and updated my best selling ebook, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. For more details please go to www.ThePropertyTeacher.co.uk/PSStrat