Even after you realize such terms as ROI, Cap Rate, and IRR, there’s still an old-fashioned strategy for analyzing the best real estate deals and market opportunities. This strategy might be more relevant in today’s crisis-riddled market, such as Covid-19 and other potential economic crises. And I call that “worst case/best case/practical or realistic case.” It’s a formula that can save you from trouble while also guaranteeing you don’t miss out on opportunities. So how does it work?
Worst Case
In this instance, you evaluate the deal established in the worst scenario. Presume enormous vacancy payments and costs that escalate. Accept your worst fears and put them in writing. The point is to check precisely how bad things could get if you had the worst luck in American history. Then see if you could financially handle these events. For instance, let’s say you’re looking at purchasing an RV park. Say, “the previous three years, the average revenue was $100,000 per year, but with Covid, I want to play it safe and forecast $75,000 instead (a 25% decrease)”. And then on the expenditure category, you say, “This property has unduly undersized insurance, and the property tax should adjust upon acquisition, so I’d like to mark up the expenses by $10,000/year”. Then you run the numbers with these speculations and see if you can still produce the mortgage payment. And, if not, can you bear the negative cash flow personally until you pivot things around?
Best Case
Now you shift from your most significant worries to your most egregious optimism. Referring to the RV park example, say, “This property has no online visibility and a lousy website, so I know I can boost the revenue by 30% in the first year” or “I discovered a way to improve the energy and power efficiency on the clubhouse, and that will save $4,000 per year”. Once you conduct this most optimistic study, see how much cash could be made if everything is executed flawlessly. This strategy shows you the reasoning to take the risk associated with the worst-case scenario, and it better be significant!
Realistic Case
In this practical analysis, you are between the worst and best-case resolutions – the chances of landing in reality. This position should offer you a comfy ability to cover the mortgage and maintain an attractive cash-on-cash return (how much money you make on your down payment). The real/practical case should not be too tight but provide you room for a rainy day and less stress in covering your obligations and realizing your goals.
Putting It All Together
So here’s how it works. If you can survive the worst-case scenario and love the best-case instance – and be 100% pleased and content with the realistic case – then you should proceed with the deal. If you probably can’t survive the worst-case scenario, are not excited about the best case, and don’t look forward to the realistic one, then don’t buy it. This sort of analysis will also dispel a ton of your concerns as it scientifically puts in motion your fears and lets you factually quantify them and not just based on myths, perceptions, and legends.
Conclusion
Nothing compares to the expertise and guidance of a professional real estate consultant. TK Real Estate Group offers some of the best services and opportunities in the industry; click here to schedule a free session. The “worst-case/best-case/realistic case” analysis can tell you a considerable amount about your deal and whether it fits you as the buyer. It’s a retro strategy but is still infinitely adequate as a tool than many online spreadsheet concepts, most especially in uncertain market trends. If you can survive the worst, love the best, and be content with the realistic, you will have a profitable, satisfactory, and low-stress experience.
