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Unlocking Creative Deal Analysis in Real Estate Investing

Ever wondered how to maximize your real estate investment returns without sticking strictly to the usual “wholesale” or “fix-and-flip” routes? If yes, then you’re in for a treat. Today, we’ll dive into the nuances of creative deal analysis and explore strategies that go beyond typical wholesaling methods. By understanding various techniques, you can find multiple ways to profit, enhance your portfolio, and navigate the real estate market’s shifting dynamics. Ready to unlock some knowledge? Let’s get started!

Understanding the Limitation of Wholesaling

Wholesaling is often the entry point for many new investors. The idea is simple: secure a property at a discount, then sell or assign the contract to another buyer for a profit. But here’s the catch—wholesaling has its limits. Many investors flock to wholesaling because it’s popular and appears straightforward. Yet, they often find themselves competing against a sea of amateurs who don’t fully grasp what they’re doing. This competition can drive up prices and diminish your profits.

Exploring Creative Strategies

Setting the Stage: Deal Analysis

Don’t just think like a wholesaler; think like a real estate investor. What does that mean? Instead of focusing solely on getting properties at 75% of their After Repair Value (ARV) minus repairs, open your mind to other strategies. One of the most lucrative ways is employing creative financing techniques like subject-to transactions and wraparound mortgages.

My First Steps: Zero Out-of-Pocket

When I first started, I didn’t use any of my own money for my first 60 deals. My primary strategies involved subject-to transactions and wraparound mortgages, both of which allowed me to buy properties without significant upfront costs.

Subject-To Transactions

In a subject-to transaction, you take over the seller’s existing mortgage while the loan remains in their name. This allows you to secure a property without qualifying for a new loan.

Wraparound Mortgages

A wraparound mortgage is a junior loan that wraps around the existing loan. You essentially create a new mortgage that includes the remaining balance of the existing loan plus any additional amount you agree upon with the seller.

Realities of the Market

The market is shifting, and we are entering a correction phase—this is not to say the sky is falling, but it’s crucial to adapt our strategies. Case in point: the Tech Triangle, stretching from Dallas to Houston to San Antonio, is expected to grow by 10 million more people in the next decade. Even if market prices dip temporarily, demand will likely keep appreciation steady in the long run.

Diving into Deal Analysis: The 75% Rule

Traditional Method

Traditionally, investors aim to buy properties at 75% of their ARV minus repair costs. Here’s the basic formula:

Sale Price – Expenses – Desired Profit = Acquisition Price

For example, if the ARV of a property is $100,000 and it needs $20,000 in repairs, the calculation would be as follows:

  • ARV: $100,000
  • Repairs: $20,000
  • Desired Profit: (Varies, but let’s say you want $10,000)

So, you would aim to acquire the property at:

100,000 x 0.75 – 20,000 – 10,000 = $45,000

The Creative Approach: Beyond Wholesaling

However, as creative investors, we need to break free from these rigid formulas and think outside the box. Here’s a more nuanced approach that considers multiple profit centers:

  1. Cash Upfront
  2. Cash Flow
  3. Equity

Cash Flow Strategy: Backing into the Deal

Let’s say you find a property with an ARV of $100,000. The seller wants $85,000, and it needs no repairs. At first glance, it seems like a bad deal because the acquisition price is too high. But what if we looked at the potential cash flow?

  1. Identify Income: Determine the monthly rental income for the property. Let’s say it rents for $1,000/month.
  2. Calculate Expenses: Subtract your expenses, including the existing mortgage payment, taxes, insurance, etc.
    • Mortgage (at 4.5% interest): $445/month
    • Taxes: $125/month
    • Insurance: $125/month
    • Total Expenses: $695/month
  3. Determine Cash Flow: Subtract these expenses from your rental income.
    • $1,000 – $695 = $305/month
  4. Analyze Profitability: If you can break even or profit within an acceptable timeframe (e.g., 18 months), the deal is worth pursuing.

Real-Life Example: Combining Strategies

Imagine you find a property with an ARV of $100,000, and the seller is firm at $85,000. Moreover, the property is currently mortgaged at $50,000, and the seller wants $35,000 as equity. Here’s how you structure the deal:

  1. Assume the existing mortgage of $50,000 at 4% interest, with payments of $261/month.
  2. Offer the seller a new loan (wraparound mortgage) for their $35,000 equity at 4.5% interest for 126 months, bringing the total monthly payment to $349.

Calculating Cash Flow

  • Rental Income: $1,000/month
  • Expenses:
    • Existing Mortgage: $261
    • Seller’s Wraparound: $349
    • Taxes and Insurance: $250
    • Total Expenses: $860
  • Net Cash Flow:
    • $1,000 – $860 = $140/month

Though you might accept less initial cash flow, future equity gains and cash flow increase will make the deal worthwhile.

Why Use Creative Strategies?

Diversify Risk and Income

Using multiple strategies like subject-to transactions, wraparound mortgages, and lease options help diversify your income streams and mitigate risks. Regular wholesaling limits you to upfront cash profits while ignoring potential cash flow and equity gains.

Adapt to Market Conditions

As the market evolves, your strategies must too. Creative financing allows you to tailor each deal to fit current conditions, making your investments more resilient and adaptable.

Wrap-up

Real estate investing is not one-size-fits-all. The key to sustained success is versatility. By expanding your toolbox with creative financing techniques and thorough deal analysis, you can unlock new profit opportunities, mitigate risks, and adapt to market shifts. Remember, always have a “why” behind your “what” in each deal you pursue. So get out there, be creative, and make your mark in real estate!

Thank you for tuning in. If you found this post helpful, explore more educational content at Creative Cash Flow and Propelio’s Academy. Stay savvy and keep investing!

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