step by step

Alf,

I suggest that you draw a distinction between fishing for deals and then actually going into detail to evaluate them.

Fishing for deals

I use the 11 second solution to try and quickly gauge if the property is likely to be +ve cashflow. This is done when you take the weekly rent, divide it by 2 and then multiply the result but 1,000.

For example, a property that rents for $200 per week would give an 11 sec. outcome of $100,000 ((200/2)*1,000).

Anything around this level passes for further analysis.

Deal evaluation

Due diligence is the process of discovering what is not obvious about the property. My due diligence process comprises many standard forms that cover the broad topics of (in order):

1. The numbers (making sure I know what I am getting myself in for from a financial perspective).
2. The underlying property (making sure I know the state and quality of the underlying property I am buying).
3. The existing tenant (if I am buying a property with an existing tenant).

Further Comments

You’ll find that 95% of deals you come across won’t make it past the 11 sec. solution. This makes this simple calculation very valuable from a filtering tool.

Then I go on to review the numbers in more detail (as the numbers don’t lie).

Finally, if it stacks up on paper and I can agree on a price that I’m happy with then I’ll buy it subject to getting finance and a builder’s inspection to my satisfaction.

I can see no sense in paying for a building inspection on a property you are not completely interested in.

If appropriate I will also get a quantity surveyor’s report too.

As for depreciation – I don’t factor it in when I buy, but I see it as a bonus. However, other investors with a need to wipe out tax might be more inclined to place more emphasis on depreciation benefits.

It all depends on your strategy… do you want to make money from day one, or do you want to save tax now and maybe make money in the future with potential capital gains?

Regards,

Steve McKnight