What’s a Good Deal?
Our first question to investors is always… What’s a good deal for you? Real estate investing is a fantastic vehicle to earn a great income and build wealth. Putting together a game plan for success should involve your personal definition of a “Good deal”. ELEVATION uses three key metrics in our project analysis. These help us stay laser focused on which properties to target and more importantly, which ones to keep. Metrics are especially helpful when there are multiple properties to consider. We feel it’s important to evaluate any potential deal through the following analytical approach:
1) Dollars Per Day ($/D): This measures the net profit per day an investor owns a project. It takes into account every day from purchase, through rehab, listing, and closing a property on the sales side. It also must include every dollar spent on a project from rehab, to holding costs, taxes, insurance, staging and many more! This strategy allows us to implement our favorite term: Velocity of Money as a way to measure how fast you can turn over capital to achieve maximum profit in a year. Our goal is to exceed $450/Day.
2) Net Profit: The second measure is the raw dollar amount of profit on a net basis after all expenses have been taken into account. Many investors use this as their #1 metric but there are many factors to consider in order to achieve your specific investment goals. Would you rather make $55k on a project or $39k? We all want to make more money per deal but when the $55k project takes you 8 months and the $39k project takes you 8 weeks, the it’s time to make some tough decisions on which project to pursue. Our goal is to exceed a $52,000 net profit on single family and $30,000 net profit on condo/townhomes.
3) ROI: Return on Investment is a great metric to use and one which you can compare to other investment opportunities (i.e. stocks, bonds, venture capital). This measure is calculated by dividing the net profit on a project by the capital you’ve invested. We evaluate each property independently and do not run an annualized return model. For example, a $40k net profit on a project which requires $400k in total capital would be a 10% ROI for an all cash purchase. Many investors include a cash on cash return in addition to ROI which is actual cash invested divided by net profit. Our goal is to exceed 13% on single family and 11% on condo/townhomes.
KEY TAKEAWAYS
Setting up guidelines for your investment returns will keep you focused on sourcing and purchasing the right properties. Everyone has different guidelines which fit their investing “lifestyle” including returns, rehab complexity, capital used, and many more. Give us a call or drop us a line to share your guidelines, thoughts, and anything we can help you with in 2021!