Getting Honest with yourself about the numbers
Over the weekend one of my relatives asked me to take a look at a couple of properties she was interested in buying. They were both commercial, which is why she had come to me.
This wasn't her first rodeo when it came to investing in property. I think she has a flat somewhere – but it was her first commercial.
For that reason, she'd already done some research and due diligence.
1- She'd travelled to the two properties… and with one of them she stayed for a week while she explored the town, spoke to people, and done some due diligence.
2- The first commercial was vacant. It was in a good area so no biggie – she'd fill it no worries…
Then she showed me her numbers. She was all excited because she could afford either of them and the numbers looked good on both of them…
Or so she thought.
But there were a few gaps in her numbers… Common mistakes that a lot of people make… I show you what they were in a second but I make mention of it because it's an example of how people often fool themselves.
They deliberately miss out certain figures. I dunno – maybe it's one of those “If I close my eyes and pretend its not there it will go away” kind of deals.
So she'd travelled to the town and stayed for a week… “Where are your travel expenses” I asked?
One of the properties was vacant. “Where are your GST calculations?” I asked…
At this point, she started to look a little white and sweaty…
Then, I looked at the purchase price and the outgoings… “Have you factored in management or are you doing that yourself?”… Blank stare.
“Ok so let's say you buy one of these…” I said, “you haven't factored in your purchase costs… legals, stamp duty, building inspections etc.”
That's when she started to get what I was driving at.
Her numbers were delusional.
Don't get me wrong – they weren't disastrous, but it was going to take her 8% yield down to 6.8% at least…
Suddenly neither property was looking as good as she thought. She’d fooled herself into wasting time on these properties because she wasn’t being honest with herself about the cost of investing.
The thing is that I’d much rather see her land a deal where there are no surprises, and she knows what she’s getting into than to land one that is full of nasty shocks because she didn’t do her numbers right.
In the end, I did save the day though.
One of the deals was going to be nothing but headaches. The other one was not bad… it wasn’t great, but it wasn’t terrible either.
The one that was ok had some land out the back, rear lane access and the potential to build another rentable space. All good stuff.
But then we spent some time online and I found her 3 other properties which, at first glance, looked better than the two she’s come to me with.
I also showed her all the things she should be figuring into her numbers if she didn’t want to end up in the same situation again…
Basically, I gave her a crash course in “Honest Numbers”
It’s a few days later and she’s already eliminated two of the properties I found her and looking seriously at the third.
Now I think she’s on her way.
At the end of the day it’s all very well finding AMAZING property deals but if they are based on dodgy numbers they may end up causing you trouble down the track.
I like to factor in every expense I can find into my calculations – that way when you get the cash flow starting to roll in – it can only get better and better.