Real estate projects typically break down into three categories, which are the easy ones to identify:
The first is a project that will immediately generate positive cash flow. The second project can generate positive cash flow in the short term but has only moderate potential for growth over time. The final category does not generate any revenue until months or years later when it becomes large enough to do so. It also has limited prospects for growth, meaning it is likely better realized as an investment than as a home.
These three categories are listed in order of probability for a particular real estate project. In short, the last category would be avoided if a serious effort is made to go after it. The first category is the one that should be tackled first. The second and third categories suggest that it’s time to take a step back and reexamine the overall purpose of the property in question. Without a clear purpose, it should be abandoned as a potential project.
While it might seem obvious that you want to tackle hoi hup projects with the highest probability of success, sometimes this is different. I can make a strong case that the first category is the best bet for further investment.
Let’s take a project with known cash flow potential. There are three primary goals:
Creating a positive cash flow, increasing the value of the property, and making money from the project
The easiest cash flow project to identify would be one that generates $10K/month in income at no cost to you. This would be what many people call “office” space. There was such a project selling for $100K that was reasonably well maintained, in good repair, and located in an area with similar demographics. You go look at it and fall in love immediately with its potential.
This is what I refer to as an easy project. It’s a project that will do well in less than 24 months if you implement your plan. You don’t need to spend much time poring over spreadsheets and charts, looking at the new property in detail, or analyzing financials. You can make your decision based on what you like and what you can envision with the ability to see it in place within a few months. It’s an easy project to get started.
But say you are a new or young investor with limited experience in the real estate business. You know where the property is, and you like it, but that’s about all. You don’t have the time, or it will take too much time to do a solid inspection of the property. After all, since you are buying bank-owned or foreclosed properties with no money down, you can move on if it isn’t up to par.
Let’s say this is not a property that meets your criteria for being an easy project. It may need significant repairs or improvements before you rent it out. Perhaps it is in need of major renovations to make rents feasible.. You may not have labor lined up at a reasonable price when needed without advance notice.
