The numbers may look good, but it is a terrible investment.

[Tom Goans]

My opinion, what is yours?

If you have difficulty renting or selling, great numbers are meaningless. The numbers may look good, but it is a terrible investment.

Many times, I have been presented with investment opportunities by “wholesalers” and real estate agents with high returns on investment ... according to the numbers they assumed. The investments were terrible risks and losers.

Example 1. I was presented an investment opportunity to buy. The “wholesaler” gave me the numbers he compiled. This included assuming a monthly rent amount of $1,200.00. This was the only way to get a positive annual cash flow.

The problem, the average annual income for the primary target is $46,000. In my opinion, the rent amount in the proposal is too high and too much of a burden for the target markets. My Opinion. I prefer to make deposits, not be a burden and have high turnovers.

In my opinion, the target market is the first and primary consideration when analyzing an investment and running the numbers. I feel you must back into the analysis to prepare the numbers for analysis. If you have difficulty renting or selling, great numbers are meaningless.

Example 2. A real estate agent presented what he considered an excellent purchase. It was a large number of residential lots within a several years old subdivision. The problem and why the present developer could not sell the lots? The lot price far exceeded the local market and what the target market could afford or would pay. The real estate agent defended the price by stating the amount the developer paid for the land. Then he said that it is industry standard to multiply this amount by 4 to determine the lot price. This is backwards in my opinion. The first consideration is the target market, demographics, and the target market’s desire and trends. All is ignored by what the real estate agent considered the industry standard.

It is my opinion that if the target cannot afford the property, does not want the property, the trend is moving in a different way, you will find it extremely difficult to rent or sell the real estate investment. In fact, it is no longer an investment, it is a liability.

Example 3. The largest foreclosure ever recorded in El Paso County was when a local developer defaulted on a large development loan. The numbers looked good when the business plan was written. It looked good to the lender. Yet, there were NO BUYERS. In fact, this same developer lost several development properties to foreclosure, went broke, and closed the real estate office.

Numbers come second when analyzing an investment. Manipulating numbers to make the investment work is dangerous to success. The target market and market trends are critical to success.

My opinion, what is yours?