Here are the two questions you've got to ask yourself when you're analyzing any deal.
When I get into the Cash Flow Analyzer software and receive the offering memorandum from students, I start looking at it and call them up. As soon as we discuss it, they can't even answer the first question. If they can't answer the first question, most likely they can't even get to the second question. So let me tell you what it is that I'm talking about.
The first question is, what's my exit strategy? Why am I buying this property? What is it about this property that excites me? If I'm going to sit in front of a group of investors, I can say, “this is a good deal, because…” You've always got to...
I want to come up with a rule that everybody can use and keep in their back pocket. When you're analyzing a deal and you're trying to figure out exactly what to do, you can apply this rule and it's going to give you the answer towards how this works.
So, what is the rule that we apply to make a determination? What you learned was that to capitalize the income, you increase the value of the property, and you pay more for it if you do it wrong. You don't want to be in that situation! So what rule can we use to come up with a solution so we know exactly how to do it?
Here's a new rule : If the tenant modifies their behavior the next month and then the income disappears, it's not income worthy of capitalization (ergo, it's Bad Income).
So always ask yourself the question - What if the tenant changed their behavior? What if the tenant started to perform under the terms of...