Due Diligence Needed For High Cash Flow Properties
Larry Arth writes an article for the website How to Buy Real Estate wherein he says that the seller’s word is not the one to be trusted when it comes to the subject of high cash flow. What the sellers smartly avoid telling you are the list of expenses which reduce the cash flow generated on a given property.
How buying and selling works (the psychology)
Just think of the golden doctrine of buying and selling. Is it not obvious that the seller always focuses on the best results all the while shrewdly putting a blindfold over everything that could alter the happy turn of events?
Repairs on a latter day
When the seller or his agents talk about the kind of returns (20% to 30%) that the prospective property may bring to you, they don’t tell you that this may only be possible till the time expenses like repairs do not creep in. And mind you, you won’t love these repairs because you cannot claim tax deductions for them which apply in the case of negatively geared properties.
What the sellers also categorically refrain from telling you is that the properties may lie vacant for a period of time between the moving out of a tenant and the moving in of another. These times do a lot in offsetting the high cash flow mind frame that you may be in.
You can read the original article here
As investors, we like hearing great things about the properties we buy but two things beg for analysis. First, had the returns been so brilliant why the need for the sale in the first place? Of course, there can be x number of reasons for it, too, but the least you can do is to conduct your Due Diligence.
And second, just to reiterate the point made by Arth, no property investor should blindly buy into the returns without pondering over the latter day expenses or ‘cost-offsetting’ that might be involved.