A field of green houses with one red house. A magnifying glass searching for the red house.

How to Find the Best Deals

Ready to buy your first investment property? Step one: Read this.

Wondering how the wealthiest people in America made their fortunes? Last year, 33 U.S. billionaires made their money in real estate, according to the Forbes 400 list. If that doesn’t whet your appetite for finally getting in on the real estate investment train, I don’t know what will.

Now that I have your attention, are you feeling motivated to take action? There’s no reason why you can’t end up on that prestigious list of who’s who. Of course, it all begins with finding the best deals. And while there’s no guaranteed methodology, I’m going to share the blueprint Robert and I have successfully used for decades.

For us, the winning formula is to look for properties that will yield cash flow AND the potential for capital gains. Why? While we aren’t flippers (we believe in holding onto our investments as long as they are generating cash flow and passive income), we do like having options. And someday, we may want/need to sell—wouldn’t it be nice to do so for profit? Of course! So let’s dig deeper.

Spend some time upfront determining the criteria under which all property options must align. That way, you’ll know immediately if something is worth investigating or not. For instance, early on one of my must-haves was a property close to my home. It’s important to be able to get to know that neighborhood very well, which is much easier when you have access. In fact, my first real estate investment was so close, I could jog there—and I did so a few times a week to see if other homes were for sale, what the vibe was like, if there were any notable changes in the area, etc.

When it comes to your first investment, size does matter—and I firmly believe smaller is better. You should invest a lot of time and only a little money in your first deal, however so many people tend to do the opposite. Gee, I wonder why they fail? The smaller the investment, the less risk you face. Isn’t that a good idea when you’re on a learning curve?

Look for properties with problems. I’ll bet you weren’t expecting me to say that! But honestly, one of the best things you can find is a property with a problem that you can solve. When Robert and I came across an apartment building in Phoenix, with a 37% vacancy rate we asked ourselves the following question: “How can we solve this problem?” It turned out the property was being run as a hotel: People could rent a fully furnished apartment for anywhere from a week to a year. However, nobody wants to be in Phoenix in the summer, so most of the units sat vacant during those months. We did our research and converted the property from short-term hotel rentals to regular long-term rental apartments. The vacancy rate went from 37% to 3%—and the property’s value soared. We were winning on both cash flow and capital gains!

Become a pro at reading pro formas. A pro forma is a type of financial statement for an investment property. But unlike a cash flow statement representing current income and expenses, a pro forma is a projection of anticipated income and expenses. Most pro formas don’t show actual operating numbers. Ask the agent, since it’s his or her job to gather the information on a pro forma in order to market the property to potential buyers. Once you understand the basic elements, you’ll always be able to get to the information you need. The numbers on a pro forma will tell you whether a property qualifies for further review. If you decide to pursue the property you will then use the pro forma numbers as a starting point for the financial analysis you will do with Rich Dad’s Real Estate Evaluator™.

Negotiate based on numbers, not emotions. Have a maximum figure, a figure you will not go above, in mind before you begin negotiating. When you reach that figure you’ll either need to pull out of the deal or get other concessions to make the purchase of this property economically feasible. So, don’t fall in love with the property. You must be ready to walk away from the deal if you cannot come to a favorable understanding with the seller. You’re in this deal to make money, after all.

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