Is it EVER okay to do a ‘bad deal’? Sometimes it is and other times it’s definitely not. How can you tell the difference?
In this video, I cover the 3 scenarios when it might be OK to do a “bad deal” but I also issue a stern warning about what NOT to do in today’s market.
Watch this video (or keep reading):
Scenario #1: You’re Using Your Own Money
If you are working with investors, you need a deal that will yield pretty high returns. (I recommend an Average Annual Return of 20% to 25%.) This way, you can pay the Limited Partners the return they’re looking for AND have enough left over to pay yourself!
If, on the other hand, you’re using your own money to finance the deal, it’s OK to settle for 10% to 15% because those returns are ALL YOURS. Remember, the SDA assumes that you’re responsible to investors. But what would be a bad deal if investors were involved can actually be a good idea if you’re funding it yourself.
Scenario #2: Your Investors Have Different Expectations
The sophisticated investors in our Nighthawk Equity network won’t get out of bed for anything less than a 15% Average Annual Return (AAR). But this may not be the case for the investors who are supporting you.
Your friends and family might be totally stoked to earn 10% AAR every year for the next 5 years. If so, it’s appropriate to move forward with a multifamily deal that aligns with their expectations—even if it doesn’t get the Green Light on the SDA. What’s constitutes a good deal is relative to your investor’s criteria.
Scenario #3: This is Your First Multifamily Deal
The value of your first deal far exceeds any money you will make from it. In fact, the experience is worth it even if you don’t earn a penny because it triggers The Law of the First Deal. (For a full explanation of The Law of the First Deal, check out my book, Financial Freedom with Real Estate Investing.)
In a nutshell, The Law of the First Deal asserts that once you’ve got one multifamily deal under your belt, the second and third will follow in rapid—almost automatic—succession. So, building your resume with Deal #1 is critical because it gets the ball rolling. And most people can cover their living expenses and achieve financial freedom in 3 deals or less! (Learn how this works by watching this video: How to Quit Your Job in 3 Deals or Less!)
A Word of Warning About Underwriting
Please don’t misunderstand me, here. This DOES NOT mean that you should compromise your underwriting criteria:
- DO NOT skimp on the reserves you establish at closing
- DO NOT sign up for an interest-only loan that comes due in 2 years
- DO NOT project super-high rents
In general, DO NOT make concessions when it comes to the performance of the multifmaily property. The ONLY wiggle room is in the return criteria, where it’s OK to settle for a little less if the numbers are consistent with your LP’s expectations.
When It’s OK to Do a Bad Deal
In summary, there are 3 scenarios when a bad deal (according to the SDA) might actually be a good thing:
1. When you’re using your own money to finance the deal
2. When your investors’ expectations align with projected returns
3. When you’re working on your very first deal
Of course, it’s never OK to compromise your underwriting criteria, but if the AAR numbers work for you and your investors, the deal is worth considering.
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