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Chapter 5: Making Money.

You may find a great house, in a great location, with the potential of great returns, but whether or not it?s a good deal will always come down to the numbers.

Sadly, most investors never even get this far. They decide to buy based on their “opinion” or “gut feeling”, which usually lacks any analysis or research of the market they are buying into. I’ve heard deals done because the investor “screwed” the seller by knocking them down $5,000 – only to later find the property returns negative cash flow.

I’m sure people spend more time choosing a new $1,000 bed than a $100,000 investment property. Why? Because they don?t know how to work out if the numbers make the deal worthy of proceeding. In an attempt to hide their ignorance, such investors pay far more than what is prudent from a simple analysis of the numbers. Sometimes the “loss” may take many years to recover.

In order to calculate the numbers, you?ll need to complete a due diligence process on the target property. A due diligence is an “investigation” to discover additional information you can use to calculate a probable bottom line result. Where this is of most value is in pinpointing the “hidden” costs of ownership – such as rates and taxes in addition to understanding the existence of contingencies, such as structural building problems.

It makes sense to find out as much information as you can to avoid paying too much for a property. Remember, just because the seller wants $100,000 – doesn’t mean it is worth $100,000 to you as an investor. When emotion is involved, the price rises accordingly.

Successful investors only buy properties where they can “see” the money. This is usually done with the aid of a simple spreadsheet – like the DealAnalyser about to be released in the Inner Circle. Without a due diligence process, or a way of “seeing” the money in the deal, you run the risk of paying too much for the property – something to avoid at all costs!

Summary Of Chapter 5.

The difference between a good deal and a bad deal is simply knowing how the numbers stack up. Sadly, most investors either don't look at the numbers or only include an analysis after first becoming biased by the potential in a deal. Crunch the numbers first and compare your return with the risk free rate you could otherwise have earned. Set a benchmark for the return you require and only do deals which meet that requirement. Make use of the checklists and calculators in the Inner Circle so as to ensure the deals you do are truly profitable.

 




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