When to walk away from a deal

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What's up guys, it's James here and in today's video, I want to talk about when to walk away from a deal. This is probably one of the most important decisions that you're going to be faced with. As an investor. If you're investing in short term rental properties, or really any other asset, it's really going to be important that you have a definitive line in the sand drawn for when you walk away from a deal. And I'm going to walk through my own process for how I established that delineation point for my own self. Now, if you're interested in learning more about how to invest successfully into short term rental properties into Airbnb, then I highly recommend you check out the link in the description down below for a free training that walks through exactly that we walk through every single aspect of how to invest successfully in short term rental properties. From start to finish, we're going to give you a free analysis tool as well. So I highly recommend you click the link in the description down below, and check out that video. So that being said, this is again, like I said, one of the most important decisions that you're going to need to make as an investor is when to walk away from the deal. I always tell people that when it comes to investing, rule number one is don't lose money. Rule number two is don't lose money. That's from Warren Buffett, he's done a pretty good job of investing. And I think he's onto something there. Now the reason he says that a lot of people think that that's just him being tongue in cheek. But really, what he's saying is that not losing money is far more important than making money. Because when you lose money, you have to work disproportionately harder, or have your money work disproportionately harder in order to get right back to breakeven, for example, if you lose 10%, on $100, you're down to $90. Now, if you grow that $90 by 10%, your backup but only to $99, not to the full 100. So you've actually got to grow more than what you lost initially, just to get back to a point of breakeven. So it's incredibly important to not lose money when it comes to investing. And so the way that you can do that is by walking away from the bad deals largely another thing I always share with people that we work with is that it's always going to be if you buy a really really great property right from the outset, you make a good buying decision. Everything else from that point forward is now going to become much, much easier. And you're going to not really need to work that hard to get good returns once you bought the right asset, the right property. However, if you buy the wrong property, you don't walk away from a deal that you should have walked away from, then now you're going to have to work really, really hard. And even still, even when you work really, really hard, your returns are still going to be pretty underwhelming, and that's because you've just purchased the wrong property, you just bought the wrong asset. And so there's no real salvaging at that point, you can maybe do an okay job of salvaging it, but it's never going to become this knock out of the park home run unless you buy right from the start. And so obviously, a big part of that is knowing what properties to buy. But a much more common one is knowing which properties not to buy, because obviously the majority of properties you're gonna need to walk away from. And so having the right criteria, and the right process to be able to do that is super, super important. Now, obviously, initially, just understanding how to analyze properties, how to analyze a market, those sorts of things are going to be really, really important, and really, really critical for you to be able to walk away from deals right off the bat. Now again, if you're interested in learning more, you're having our access to our tools that we use to do that, check out the link in the description down below for that free training, we'll walk through that in detail. But then as you go along, there's going to be some properties that make it through that initial screening and filtering, but that you're still ultimately going to walk away from so I had the experience not too long ago now of offering on a property and that offer actually got accepted, I was really, really excited about the property, I had paid about $1,000 to get both a property and a septic inspection done at the property, I took time out to actually go and see the property. And so at that point, there is what we call a sunk cost bias because at that point, now I was emotionally invested in the property, I really, really liked this property, it was in a really great location, there was no neighbors nearby, the actual land that was on was really, really cool. There's a lot of stuff that I really, really loved about this property. And not only that, but I had all this sunken cost, I had my time I had my energy, my Realtors time and I felt bad for my realtor because I wanted to make sure that my realtor was making good money and you know, she was making, making a good return on her investment of her time and working with me. And then I also had the sunken cost of the money that I'd spent on the inspection, all the sunken costs. And so it can become pretty emotionally and kind of mentally challenging at that point to walk away from a deal like that once you've sunk so much into it. So that's where it's becomes really, really important. This is where you really separate the good from the bad investors is you have to make sure that you stay disciplined and that you don't let your emotions and your mental challenges get the best of you. You need to know when to walk away. And so for this particular property in the inspection that we thought was going to Come back clean and show a few small things, there were actually some foundational issues with the property. Now, foundation issues for any of you guys who have bought properties before you know that that's not a good thing, it's not a good sign. Now in this particular case, the foundation had some shoddy work done in it. And so there's going to be quite an extensive amount of work needed to be done, that wouldn't really add value to the property. And so I was gonna need to sink another 20 to 30, maybe even $40,000 in cash into this property, it also revealed that some other work around the house had been done by a kind of weekend warrior, so to speak. So it wasn't really done the way that it should be done. And so there was going to be about another $10,000 Just kind of fixing things up. And then I was also going to have to deal with the fact that if all this stuff that we can see is not really done, well, what about all the stuff that we can't see. And so at that point, I did try to negotiate with the proper because again, I was really in love with this property, there's a lot of really great positives for it in terms of the location, the land, it was on everything else. And so I tried to negotiate with the seller of the property. Now unfortunately, the seller of this property was incredibly unreasonable wasn't willing to negotiate at all, and was honestly throwing out a whole bunch of conspiracy theories about our inspector and the validity of everything and just arguing a lot of different stuff. And so in the end, I had to make this tough call of saying, You know what note we're going to need to walk away from this property. Luckily, I had a realtor who was absolutely phenomenal, who helped me to come to that decision. And so ultimately, we walked away. Now, the cool thing is that that same day that we walked away from that property, I found another property that we you know, within a few days, we had gone by seen it, put an offer and got the offer accepted, and I've now closed on that property. So it all ended up really well, I'm actually very, very happy that I walked away from that deal, because I got a much, much better deal in its place. But especially when you've been looking for a long time and you've got costs sunk into it, then it really starts to play with your head. And so I really just want to remind people with this video, that it's much, much more important to know when to walk away from a deal and to be disciplined about walking away from a deal than it is to know which properties are the right ones, knowing which properties are wrong is honestly more than half of the battle. And so you really need to be disciplined about doing that. Because otherwise, had I gone that route, I'd be way more cash, I'd have a worse property. And ultimately, I wouldn't be able to get as good of a return on an investment as I would want. Now, the long term impact of that is it then my money is not making as much money. So it slows down my process to getting the next property which then will slow down my process to getting the next property. And so my whole growth curve, do you ever see like a compound growth curve, how

it shoots up? Well, that hockey stick curve is just gonna be effectively pushed back by several years, I'm really going to be delayed in getting to where I want to be financially. So it's really important. And the best way that I've found to know when to walk away from a deal is to make sure that you set very clear specific criteria for your own self in terms of how much money you're going to be putting into the deal for cash down payment, closing costs, renovation costs, everything like that, and make sure that you're never going to be exceeding that amount. You never want to buy too much house or buy too much project for what your budget can afford. There's nothing worse than doing a renovation job or buying a property with more cash than you anticipated. And then suddenly, you're pressured to cut corners and do things where you don't want to make big sacrifices. So that's number one is just understand exactly what amount of cash you're ready to put into the deal. And don't compromise on that with yourself and kind of escalate yourself, it can really be a stair step that people end up doing where First off, it's okay, it's only another $5,000 Well, but then if I'm doing that, I might as well do this other thing, because then it's only an extra $10,000. And then before you know it, you're $40,000 or $50,000, ahead of where you thought you were going to be on this project. So that's number one, knowing the amount of cash you want to have into the deal, and you're prepared to put into the deal. Number two is knowing what your rock bottom numbers are. So you need to really make sure that you do a great job of analysis. Again, if you want to learn how to do that and get our tools for analyzing properties. The link is in the description down below for that training. But you really need to know number one, what is the worst case scenario and reevaluate the worst case scenario as you get more information on the deal? And then also know what your average scenario is? And what is the least that you're willing to accept as that average scenario, and make sure again, that you're updating the numbers on that for the deal. So in my case, with this deal, it ended up taking getting to the point where it was going to take more cash than I had originally planned. But I was okay with the initial initial cash outlay. So that was something where the deal originally I had said, here's how much cash I can spend on deal and the deal initially was going to be less than that amount. So that was great. But then when we found out what the additional work being done, it came up to how much cash I was prepared to spend but not over it. So it actually wasn't the cash outlay that ended up stopping me from doing the deal. What it was what is the return on investment. So I looked at it and in a worst case scenario, our our cash on cash return was actually going to be a little bit lower than where I like it to be, but still didn't didn't drop below breakeven. So that's always for me the break even point like, that's where I'm going to walk away. If I can't be sure that even in a worst case scenario, the deal is going to be at breakeven cashflow, meaning that it's not going to cost me money each month to carry the property, then I will walk away. And this one, the numbers checked out on the worst case scenario, but where it really started to fall apart was on the average scenario, because I'd be putting substantially more cash into the deal, my cash on cash return dropped in an average scenario down below 15%. Now for me, that's my my bare minimum of what I want in an average scenario, ideally, I want my average scenario to yield 20 or 30%, cash on cash, but I will accept 15% With the right deal. Now with this one, it actually dropped below that. And so with that in mind, I walked away. Now had I been able to negotiate with the seller more effectively, and drop that purchase price down, then I could have gotten the cash on cash to an area where it would have been acceptable for me, and I could have pursued the deal further. But because the seller wasn't willing to negotiate, I had to draw that line in the sand, be disciplined and walk away from that deal. So again, this really just comes down to knowing exactly how much cash you have, that you're ready to put into a deal. Knowing what your worst case scenario is going to look like and what your minimum acceptable standard is for that make sure that you're updating your numbers as the deal as you get more information. And then lastly, knowing what you're aiming for what the goal is in an average scenario, and make sure that you're updating your numbers. As you get more information, make sure you're never compromising on any of those three things, you never want to take on a deal, it's going to take more cash to get to the finish line than what you anticipated, or what you're prepared to spend. You never want to take on a deal that's going to go below your minimum standards for a worst case scenario. And I highly recommend you've set that at least at breakeven, and you never want to do a deal where you're not going to be assured that you should at least bring in about 15% cash on cash in an average scenario. Again, you can set that standard or whatever is most comfortable for you, you might want to be more or less aggressive than I am. But you want to make sure you set those standards for yourself and stay really disciplined with them. So all that being said, I hope this video is valuable to you, I hope it was helpful to you. And I can help just one person walk away from just one deal where the numbers don't pencil out, then I will consider that a really really big success because of how impactful it is for someone to do a bad deal and actually buy the wrong property. If you liked this video, give it a thumbs up again, if you want to learn more about exactly how to invest successfully in short term rental properties and get 1520 30% cash on cash returns. Then check out the link in the description down below. Check out our free training that walks through all of that in detail. And then you'll also be able to grab our analysis spreadsheet completely free so you can use that when with your own investing to make sure that you analyze deals properly and know your numbers. Anything else just drop me a comment in any note in the comment section down below if you have any questions, anything you'd like to talk to me about or anything you'd like me to discuss in upcoming videos, and if you haven't yet, make sure you subscribe to the channel. All that said I hope you have a fantastic rest of your day and I'll see you in the next video..