Every apartment investor wants a good deal. But a good deal for one investor may be a poor choice for another investor. Here are four categories of “good deal.” Which one is right for you?
Highest Cash on Cash Return
Some people want the highest immediate percentage return on their invested equity. They want the strongest cash on cash return they can get. This buyer will go to any ZIP Code, buy any age of property, and whichever unit mix that will net the highest cash return.
Highest Capital Growth
Other investors want to grow their capital as much as possible within a couple of years. At purchase the property could be poorly run. It may have deferred maintenance and dubious tenancy. It might be the ugliest building in its census tract.
These buyers know that creating value comes from solving fixable problems. They are like people who restore vintage cars found abandoned for years in garages. They know that intelligently adding money and energy will boost cash flow and value. They can tolerate months of negative cash flow. The buyer will aim to increase the property’s value so they can sell it at a substantial profit within a couple of years.
Ease of Ownership
Some buyers want an asset that’s in creampuff condition. They want to maintain the property and collect rent checks, nothing more. This stabilized asset has wonderful tenants. The rents are at the high end of market. It is like buying a new car. You pay a premium for peace of mind and ease of ownership.
Bragging Rights or Tax Write-Off
Some buyers don’t care about capital growth or cash flow. A portion of those buyers want bragging rights properties in what everyone recognizes as a world-class, rich area. Many of these folks are motivated by tax deductions they can get. They have more than adequate income and resent paying a huge portion of it to the government.
It’s Important to Know Where You Want to Go
You won’t know what a good deal is for you unless you know your objective. Consider the following from Alice in Wonderland.
‘‘’Would you tell me, please, which way I ought to go from here?’
‘That depends a good deal on where you want to get to,’ said the Cat.
‘I don’t much care where–’ said Alice.
‘Then it doesn’t matter which way you go,’ said the Cat.”
I can help you choose the route to your goal, but you need to know where you want to go. When we work with new clients we determine their objectives before we recommend properties. When our clients know what kind of good investment they want, it’s easy to evaluate investment opportunities.
Decide what kind of good deal is best for you. Start with these categories. Then evaluate every opportunity based on what’s best for you. You’ll find more in the chapter, “Understand Your Values and Priorities” in Building Legacy Wealth.
Terry Moore, CCIM, is the author of Building Legacy Wealth: How to Build Wealth and Live a Life Worth Imitating. Read his “Welcome to My Blog.”