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Return To Cashflow Article Archive   Search the Article Archives Dont Buy An Alligator By Roger Beattie There is nothing more expensive than empty real estate, and there is nothing more problematic than buying an alligator. In our case the alligator is negative cash flow. Too often in our business we make decisions on emotion. The excitement of the deal blinds us to the realities that will come home to roost and stay long after the thrill has lapsed. The best advice I can ever give any real estate investor is simple. 'Never buy a bad deal.' In the vast majority of cases, a bad deal is easy to spot. It is simply a matter of doing a simple cash flow calculation. Heres the rule: 'If the NOI (net operating income) will not support the debt service necessary in a deal, dont buy it!' Heres an actual example. I received an offering from a well know commercial brokerage the other day. The pertinent facts are, Sales Price $6,500,000. Annual Income: $703,500. Annual Expenses: $320,000, and a reported NOI of $383,500. When you interpret this data into a possible purchase you will find that if you purchased the property for the asking price and invested, say 30% or $1,950,000 you would have a loan of $4,550,000. If you borrowed this amount at 6.75% over 25 years, your monthly mortgage payment would be $31,436 and result in an annual obligation of $377,232. If you subtract your debt service of $377,232 from the NOI of $383,500 you would achieve an annual cash flow of only $6,268. That represents a whopping percentage return of .32% on your $1,950,000 investment. It never ceases to amaze me that offers to sell like this are even made. But they are every day. It doesnt matter whether you are talking about a $100,000 property or a $100,000,000 property. The rules are the same. 1. Get the offering information. 2. If the NOI suggested by the Seller will not cover the debt service expected and produce a reasonable cash flow, dont waste a lot of time. It doesnt matter how cute, fancy or impressive the property is, if it wont cash flow; it should be a no-go! This one simple process will immediately cut the majority of unworkable deals out of your pipeline. This quick review is the first step you should take in reviewing any possible investment property acquisition and its the most important because it will save you time and possible long-term trouble. Remember, if the NOI wont cover the Debt Service expected, go on to another deal. About the Author: Roger Beattie is a real estate broker, invester, owner and operator. He recently started Middle Class Millionaires to teach the method and benefits of long-term real estate investing. http://www.middleclassmillionaires.com Business Money Saving Tip

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