Due Diligence: The Difference Between a Successful and Failed Investment

Performing your due diligence when considering a real estate investment opportunity is the single most important step to ensuring an investment that meets your expectations.Due diligence

Unfortunately most real estate investors that I’ve mentored have shared with me countless tales of errors and assumptions that have cost them severely. For this reason I am sharing an email that I sent this morning to help novice investors to learn.

The following email with attached cashflow analysis asks the questions required to ensure that I can make an informed decision without assumption. It also shows the realtor that I am serious, experienced and respectful of his time.

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How to Perform a Real Estate Cashflow Analysis

This is what a real estate cashflow analysis looks like. It informs you of your up-front costs, assesses cashflow positivity with current and potential future scenarios, budgets appropriately for vacancy/repair/contingency and accounts for overhead costs even if they may be unrealized (e.g. property management, accounting, bookkeeping, etc.). It is also vital to highlight any assumptions and verify them in writing, absolutely no exceptions.

real estate cashflow analysis

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Get Over Your Fears and Take Action Today!

ObstaclesBy the end of 2011, I had completed nine years of real estate investment courses.  Acquisition, cashflow, buy & hold, flipping, landlording, rent to own, taxation law… the list goes on and on.

Despite my educational knowledge, I still had not yet purchased a single investment property. Even though I had successfully run my own company for the previous fifteen years with positive cashflow in each and every year, I was still afraid to take the plunge.

I kept asking myself “How could I take so many calculated risks but be afraid to take this one?” I was stuck in a state of fear commonly coined as “analysis paralysis”.  I would look for the perfect deal but before I would pull the trigger I’d make up excuses as to why each potential deal wouldn’t work. The truth is there’s no such thing as a perfect deal. The human mind can be our own worst enemy and I was battling against nobody other than myself. Trying to psyche myself into taking the next step, but for some reason I kept backing down, convincing myself as to why each opportunity wasn’t optimal.

In mid-2012 I booked vacation. I decided to stay home and relax. The previous two years’ vacation was spent repairing the house after extensive water damage which had nearly depleted all of my savings. It was early afternoon and I grabbed an ice cold Corona from the fridge and went to sit in the yard and do some reading. As I hunched down in my lounge chair I continued to read my latest real estate investment book. My attention was drifting in and out and I found myself reading and re-reading the materials. I felt frustration growing within me as I thought to myself “I know this s&%t. I’ve read it a hundred times in other books.” I stood up and blurted “That’s it! I’m going to buy a property or I’m going to stop reading about real estate investing.” That was the catalyst, the last nudge through the barrier of procrastination, the trigger required to break through my analysis paralysis.

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How can I make money in real estate?

disorientedEarlier this week I had a meeting with one of the local startups that I am mentoring.  Over the last year his company’s bank account has been reaping the rewards of their hard work and so he has been considering his best option to invest the returns from his compounding successes.

Knowing that I am an active real estate investor he wanted to learn about how real estate makes money.  He had performed a number of cashflow analyses, but, was failing to find lucrative returns.  I could sense his frustration mounting in each additional word that he was saying.  “The best cashflow I’ve been able to find is approximately 8% on a real estate investment and that’s just… well average”.  He frowned.  I smiled and excitedly said “That’s fantastic, you should put in an offer, do your due diligence and buy this property if everything checks out.”

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Real estate investing is based on facts, not emotions!

All of our investments go through a vigorous multi-step process including ensuring that our properties meet all of our crtieria, including the following main ones:

  • Cashflow positive even after contingencies (vacancy and repair allowance)
  • Can deal with mortgage rate fluctuation and a degree of risk
  • Attracts and maintains lower risk, lower maintenance tenants

OREIO Event Recap: Don R. Campbell, President of REIN

Ontario Real Estate Investors Organization (OREIO)Last night, my business partner Reid and I attended the Ontario Real Estate Investors Organization (OREIO) monthly event at the Travelodge Hotel on Carling in Ottawa.  This month I was very excited, because this month the presenter was one of my mentors and educators and the catalyst which brought me out of the phase that many investors get into known as “analysis paralysis”.  The presenter was none other than Don Campbell himself!

For those of you who don’t know Don Campbell, he is one of Canada’s most experienced real estate investors.  He wasn’t born into riches, didn’t have a silver spoon, he started when he was working at a customer service desk at Sears and worked his way to where he is today, one accomplishment at a time.  It wasn’t an easy ride, there’s no such thing as easy money, but he worked through the challenges as he faced them and any real estate investor can save themselves thousands or even millions in mistakes learning from his experience.  He is a realist at heart, and isn’t afraid to share both the successes and challenges he’s been through.

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