When Does A Deal Go Bad? | Real Estate Investing Made Simple

TL;DR

A real estate deal goes bad when due diligence uncovers costs or financing changes that undermine the expected return. Grant Cardone’s example starts with a $2 million, 15-unit property and $400,000 down, then adds $300,000 for roof, plumbing, and siding problems while interest rates rise. Read on to see how he checks the math and responds when the original terms stop working.

Transcript

hey grant cardone here welcome back to the car down zone where we're talking on Mondays about real estate real estate investing you can call in three oh five eight six five eight six six eight three oh five eight six five eight six six eight I'll grab my computer tell me do you have a question or do you have a deal I want to share with you a deal t... Read More

Key Insights

• 🤝 Thorough due diligence is crucial in real estate deals to uncover any potential problems that could negatively impact the profitability of the investment.
• 🍉 Changes in interest rates can significantly affect the financing terms of a deal, requiring the need for careful monitoring and potential renegotiation of terms.
• 🤝 Market conditions can change, making it necessary to reassess the deal's feasibility and adjust terms accordingly.
• 🥳 Effective communication with the seller is essential when renegotiating a deal, ensuring both parties understand the reasons for the renegotiation and the proposed solutions.

Questions & Answers

Q: When does a real estate deal go bad?

A deal can go bad when due diligence reveals expenses or financing changes that weaken the expected return. In Grant Cardone’s example, $300,000 in newly identified repairs and an interest-rate increase disrupt the original plan.

Q: What are the key numbers in Grant Cardone’s example deal?

The example is a $2 million property with 15 units. It uses a $400,000 down payment and $1.6 million in financing.

Q: How is the $400,000 down payment funded?

The buyer contributes $100,000. Three other participants collectively contribute the remaining $300,000.

Q: What return does the property produce at a 6% cap rate?

At a $2 million price and a 6% cap rate, the property produces $120,000 per year in net operating income. Cardone then compares that income with the cost of the debt.

Q: Why does the deal initially appear to return only 4%?

Cardone calculates approximately $104,000 in annual debt payments, leaving $16,000 from the property’s $120,000 net operating income. Compared with the $400,000 down payment, that is a 4% return.

Q: How does principal repayment change the return calculation?

The debt payment includes both principal and interest, not interest alone. Cardone says the loan principal is reduced by almost 2% each year, which brings the deal’s return to 6% in his example.

Q: What repair problems are discovered during due diligence?

Due diligence reveals a roof requiring $100,000, plumbing issues costing another $80,000, and siding damage from water intrusion costing $120,000. Together, those items add $300,000 and raise the deal’s effective cost from $2 million to $2.3 million.

Q: What does Grant Cardone do when interest rates and costs rise?

He says he will renegotiate after the 10-year Treasury rises and the expected interest rate spikes. The need for $300,000 in repairs also means the original deal terms no longer reflect the property’s condition or his required 6% cap rate.

Summary & Key Takeaways

• Grant Cardone discusses the process of negotiating real estate deals, emphasizing the importance of due diligence and knowing the numbers involved.

• He uses a hypothetical deal of a $2 million property to illustrate how unexpected costs, changes in interest rates, and market timing can turn a good deal into a bad one.

• Cardone highlights the need to communicate effectively with the seller when renegotiating terms and discusses the importance of understanding the math behind the deal.