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How To Buy An Investment Property - Articles

The 11 Second Solution: How To Know If A Property Is A Good Investment?

Date: 12/01/2014
How to know if a property is a good investment?
 
It was July 2000 when I first outlined ‘The 11 Second Solution” and ever since there has been a lot of discussion about the concept.
Let’s spend a few moments now looking at how the technique works, and we’ll road test it with a few examples too.

 


Homebuyers And Investors

buying a house The 11 Second Solution
Let’s begin our discussion of “The 11 Second Solution” by drawing a distinction between buying a house as a home (ie. being a homebuyer) and buying a property as an investment (ie. being an investor).
When you buy a property as a home your decision is usually based on emotion rather than potential profit. On the other hand, when you buy a property as an investment, then you’re looking to make a profit which means the less emotion involved the better.
Put another way, there’s little application for “The 11 Second Solution” when buying a house because the potential yield takes at least second spot to the emotional considerations such as location for raising children, access to lifestyle amenities etc.
However, as a cashflow investor your return will make or break you.
Which one are you… a homebuyer or a property investor?

Time Management

buying a houseThere will always be more real estate available for sale than what you could ever possibly hope to purchase. A large portion of the available property will targeted to the homebuyer market. As a positive cashflow investor, you can pretty much disregard most of it.
Yet even after narrowing down the field, there will still be many more potential properties than your available time to properly analyse each opportunity. What’s needed is a tool that will help you to filter the deals that might be positive cashflow from deals that definitely aren’t.
This is where “The 11 Second Solution” is so helpful. It allows you to quickly scan multiple properties and, using the weekly rent and the asking sales price, determine whether or not it might be positive cashflow.

What Is The 11 Second Solution?

The 11 Second Solution is a simple tool that determines the maximum sale price you can pay based on a gross return of 10.4%. This will hopefully be high enough to cover all the associated finance and ownership costs and as such will leave you with a positive net cashflow outcome.

When buying a house, there are only 4 steps to “The 11 Second Solution”. They are:

Step One: Ascertain the actual or likely weekly rental.
Step Two: Divide Step one by the number 2
Step Three: Multiply Step Two by 1,000
Step Four: If the asking price is less than or equal to Step Three, you have found a property that might be cashflow positive.

Examples

Let’s look at an example… say you find a property rented at $150 per week. How much should you be prepared to pay for it and possibly expect a positive cashflow outcome?

Step One: Weekly rent ($150)
Step Two: Weekly rent ÷ 2 ($150÷2 = $75)
Step Three: Step Two * 1,000 ($75 * 1,000 = $75,000)
Step Four: The maximum that we should expect to pay for the property is $75,000.

Further Examples

If you’ve purchased From 0 to 130 Properties in 3.5 Years then I invite you to turn to page 112 and compare your answers to the solutions below:

Caravan Park (Page 83)

Step One: Weekly rent: $1,120
Step Two: $1,120 ÷ 2 = $560
Step Three: $560 * 1,000= $560,000
Step Four: Asking Purchase Price = $120,000

Outcome: Easily meets 11 Second Solution, should be positive cashflow.

Commercial Property (Page 87)

Step One: Weekly rent: $425
Step Two: $425÷ 2 = $212.50
Step Three: $212.50 * 1,000= $212,500
Step Four: Asking Purchase Price = $155,000

Outcome: Easily meets 11 Second Solution, should be positive cashflow especially with the tenants paying rates and insurance.

Unit (Page 110)

Step One: Weekly rent: $90
Step Two: $90 ÷ 2 = $45
Step Three: $45 * 1,000= $45,000
Step Four: Asking Purchase Price = $33,000

Outcome: Easily meets 11 Second Solution, should be positive cashflow.

No Guarantee!

Just because a property meets “The 11 Second Solution” does not guarantee that the outcome will always be positive net cashflow.

Pay attention to the issues and limitations listed below:


Large Borrowings:
As you borrow more money you’ll be paying more interest which will add to the costs your cash inflow must cover. If you borrow too much (either in terms of more than 80%LVR or a high value property), then the 10.4% gross return may not be enough to cover all your interest costs.

Interest Rates:
An increase in interest rates means higher interest costs and, unless there is an increase in your cash received, you may find that a gross return of 10.4% will not be enough to cover the higher interest charges.

Guide Only:
 “The 11 Second Solution” is a time management guide only. It is not intended to provide a comprehensive due diligence over the property or when buying a house.

Finding Deals:
I concede that at the moment, finding residential properties that meet “The 11 Second Solution” is becoming quite hard. Still, the deals are out there… just don’t expect to find pretty or problem-free houses that meet the criteria. A clue to finding potential deals is that you make the most amount of money in real estate by solving problems (wink, wink!).
You might also consider commercial property too. There are currently lots of opportunities in this area but be sure to always do a thorough due diligence!

Final Words

To this day I continue to use “The 11 Second Solution” when buying a house. In fact, the exact moment that I am typing this, my business partner Dave is using the concept to evaluate potential acquisitions.
The only thing to remember when buying a house is that the technique is a time management tool and not a substitute for a full and thorough due diligence over the property.

buying a house due diligence

There are certainly plenty of opportunities still in the market place that meet the necessary criteria… perhaps focus your attention on ‘working a deal’ rather than expecting an easy and trouble free opportunity to land in your lap. Be sure to remember that you make money in property by solving people’s problems.

Profile photo of Steve McKnight

By Steve McKnight

Steve McKnight, the founder of PropertyInvesting.com, is a respected property investing authority as well as Australia's #1 best-selling business author.

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