Real Estate Investor Magazine South Africa June 2016 | Page 41

intangible items, such as title, survey, and zoning and
land-use regulations.
Knowledge of contract law, insurance, finance,
accounting, and tax law is also critical to doing things
right at the beginning to insure success at the end.
If you’ve never done it before, this is not a DIY
project. The money you think you’ll save by doing
it yourself can cost twice as much to fix, and may
jeopardize the entire investment.
Admit what you don’t know. Approach the property
like an open book test. If you don’t know the answer
to a question, find an expert who does know to give

A great property in a bad
market can be a big loser.
A poor property in a great
market can be a gold mine.
How do you know the
difference?

capital, it can be disastrous.
Using 100% financing for entry level deals is like
believing gravity doesn’t exist as you jump off a
building. You can argue all you want, but you’re going
to hit the ground the only question is how hard.
The proper use of leverage is a function of deal
structure and investment strategy. Every investment
property should be evaluated in light of the breakeven ratio.
The break-even ratio is equal to the Operating
Expenses plus the Debt Service, divided by the Gross
Potential Income. [(OpEx + DS)/ GPI = BE]. When
break-even exceeds 80%, the structure depends on
perfection, and that’s dangerous territory.

it to you.

3

Botching the math

Real estate is a numbers game. Value is dependent
on net operating income, gross revenue minus
operating expenses.
That’s why it is so important to get the real operating
numbers, not a projection of potential gross income
and estimated expenses. Confirm and verify every
element of income and expense. Value the property
based only on present income, not projected income
you have to produce.
Your profit is dependent on net income. Net income
is the net operating income minus debt service.
If you’ve overestimated revenue, underestimated
expense, or have too much debt service, your profit
will suffer or turn into a loss.
Understand that risk increases with every
assumption made. Do not assume you can save
expenses by cutting corners or that you can raise rents
the day after you take possession.
Anyone who has ever prepared a projection
of operations has realized that by tweaking the
assumptions, the bottom line can be manipulated into
whatever will make the deal work.

4

Over-leverage

Borrowing too much money in this business is
fatal. Highly leveraged deals do happen, but
unless it’s backed up by a solid plan with sufficient

www.reimag.co.za

5

Failure to have multiple exit strategies

An investment plan incorporates all of the due
diligence findings and outlines all the possible
outcomes of the investment, best case to worst case.
Ask yourself why you think you can do a better job
running this property than the seller did. If you can’t
answer that with specifics, you won’t do better, and
probably not as well.
Your plan should answer the questions of how the
property will be managed; what improvements are
needed and their cost; how much money might be
made (or lost); how long it will take; how to get out if
things go wrong; and how to access the profits when
it goes right.
The answers will reveal a realistic plan to maximize
value in the shortest possible time with the least
possible downside.
JUNE 2016 SA Real Estate Investor

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