Hi, friends welcome to multifamily Mondays with me, Pam, your podcast host. Today I want to talk about a question I get asked often, which is how do I tell the difference between a good deal versus a bad deal or a mediocre deal? And I usually return the question back to the person of well, what investment strategy Do you have at play, because that alone will highly determine whether the deal in front of you is a good one or a bad one.
But before we jump into examples of good deals and bad deals, let's define a few things. First, in general, and again, generalities here, you're going to bump into three types of investors or a combination of them. We have the long term investors, these folks hold their properties over time. And they build wealth through the properties appreciation, meaning they're banking on the property's value going up over time, while they're paying down the mortgage principal. So they're essentially building equity, then we have the short term investors, these folks will hold the property for two years or less, their goal is to get in quick, do what they need to do with the property and then flip it, sell it and moving on to the next transaction.
Then you have the cash flow investors, these folks will invest in properties that are income producing such that they will be able to pocket profits every month. So for example, myself, I'm a combination between a cash flow investor and a long term investor combined together. So I will invest in properties where I foresee the property's value growing through time, while also giving me cash flow every month, I will not invest in a property that will have a negative cash flow. So that's just what I do. But everyone is different, you have to find an investment strategy that works best for you, because there is a different exit strategy for each type of investor. Alright, so let's talk about a common good deal for a long term investor, an example of a good deal would be buying a property that is in the path of progress in that city. So for example, you may not buy in the city center or the metropolitan area, but you might buy in, you know, the suburbia area that's just in the outskirts of that main city, where you notice the path of progression, where employers are moving out that way, and you have people buying homes in that area, that would be an ideal location for a long term investor, to look into apartment buildings to buy. So an example of a bad deal would be buying in an area where you're not sure if it's progressing positively. And perhaps it's only anchored by one large employer, that is a big No, no. Because what of that one large employer leaves that area, you're probably going to lose a lot of your tenants as well. And if you're buying for long term, you don't want that type of instability. So that would be an example of a bad deal for the long term investor. So the goal is you need to be able to research heavily in the city that you plan to invest in. And we are team here, we can help you analyze the city as well, we have our services that can help you with the reports if you're unsure. And if you're not familiar with the city, the key for long term investors is investing in a city and an area where there is plenty of opportunity and is in the path for growth that is key for success right here on what a good deal would be. Alright, let's talk about what would be a good deal for a short term investor.
A good deal for a short term investor is that you land a deal that is extremely under market value, you know that there is room to make profit from it, where you can go in and do an easy fix to rehab the property with very little down payment. And then you can quickly sell it within six months to a year, as long as it's under two years, right. Most of the short term investors that I've met in my career, they want to stay six months or under, they don't even want to go beyond a year because that is their ultimate goal. So an example of a good deal, recapping here is that they need to find deals that are way under market value. And they see that they can fix it very quickly. That's an example of a good deal. Now, what is a bad deal for a short term investor? I have two examples. One pretty relevant to right now is trying to time the market, right. So if you buy a rehab project at the peak of the market, and right after you buy it, it starts to drastically decline. You're going to be stuck with that property for a while. And that is not the ultimate goal of a short term investor.
Another bad deal would be when you buy a property, you assume the loan of that property that has a prepayment penalty. What does that mean? Some loans have like a, it's called like a graduated plan or a prepayment penalty plan where you pay on the first year, if you want to exit the loan, it's a 5% penalty of the total loan amount, then four, then three, then two, then one. So it means that you need to hold the property for at least five years without having to pay the prepayment penalty on that loan. Because that bank that's lending the money wants you to keep that loan for longer. So that wouldn't be an ideal investment for a short term investor. So what constitutes a good deal for a cash flow investor? Well recall that cash flow investors invest for cash in their pockets, basically every month. So that will require purchasing a building that is pretty well maintained, meaning there's not a lot of deferred maintenance, they have a good property management in place. And the property is between like 90% to 100% occupied. So it's kind of like a well oiled machine. Those are the types of deals that would be good for a cash flow investor. Now, what would be an example of a bad deal for a cash flow investor? Well, the biggest issue would be buying into a property where you're so highly leveraged that if maybe, I don't know one to five tenants left the property, you'd be cash flowing negatively, which is a no no for a cash flow investor. Another example of a bad deal for a cash flow investor would be buying into a property with a lot of deferred maintenance, because that's going to require you to put in a lot of capital for the capital improvements, which ultimately kills what your cash flow. So as you can see here, there's a mix of good and bad deals for each and every type of investor. So what investor are you? For me, I'm a mix of a cash flow and long term investor. I like to hold my properties for long term, but they need to also generate positive cash flow every month so that I can pay our investors and ourselves. So my friends, what type of investor are you? I'll leave you with that food for thought for today. Well, my time here is up. And I'm excited to share that we are launching this text to join program. It's so cool when technology works in our favor and makes our lives easier, right. So if you text to 42828, and in the text box, you include this in one word, create wealth, it has to be together, no commas, no spaces, you'll be automatically subscribed to our newsletter will you'll have exclusive access to our events and webinars and any upcoming things that we have going on. So once again, if you text to the number four to eight to eight, and you put in the text box, create wealth, all in one word, no spaces, no commas, you'll have exclusive access to all the things that we have going on. And if you want to learn some more for today, feel free to find us. We have a YouTube channel, you can go to our website at www let's go create wealth.com or if you go on YouTube, you can search for our channel called create wealth now, or if you want to find me on Instagram, I have a handle. I'm very new to it. It's apartment Pam so very easy to remember. So once again, it's apartment Pam and I hope to connect with you on there as well. Have a great day today you guys and keep in touch with us. Email us any questions you have or any topics you want to learn more about at info at letsgocreatewealth.com.
