When you purchase real estate assets, you have to make sure you’re purchasing them at the right price. This is where you make the most money on your investments, by balancing the right price so that when you increase the value by increasing rents, your upside is going to grow. You don’t want to overpay for your property.
For example, let’s say the property was purchased for $15MM, but then you have the opportunity to increase the net operating income by 30%. If you multiply the 15MM by 6%, the NOI at the property is 900K. If you add 30% to the net operating income, you will add an additional 270K. Your new NOI will be $1,170,000, which equates to a value of $19,500,000 of value. An increased property value of $4.5MM in value. This is the best model for creating wealth in real estate.
In other words, if you can gauge the two and buy low, but then have a really good upside, then you’re going to make a really good investment and make a lot of money on your investment. Avoid overpaying and buying deals that lack upside. You will trap your equity and slow down your speed for acquiring more property. This is a big killer of growth and cash flow.
That’s the best strategy you can make to be successful. You don’t want to overpay for a property because your basis is going to be too high. Eventually, this is going to make it really hard for you to recoup your capital. If you can get a good deal on an older property that has upside potential to it, it’s well located where you can get a good pop in the rents, then that’s really going to drive you to generate a lot of cash flow and a lot of income and return on your equity.
Don’t overpay for your property!
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