What is Your Process When Analyzing Deals?

Question

What kind of process do you go through when analyzing deals?

I've been practicing by analyzing 1 deal per day and I have a very general grasp on all the factors that must be taken into account and the process, but I wanted to know what everybody else does first and how they identify a good deal before they do a deeper dive. Moreover, I want to know what people look for when they do identify a good deal.

Randall Alan · Answer

@Rowan Klecker

For me it’s mostly about cash flow - as real estate is my full time job & income.  So your question translates to “how do I find / seek cash flowing properties.”

If I jump to the end of this story first, I will tell you that at 7% interest and high market values, very little cash flows well when you take into consideration principle, interest taxes, insurance, and a $100 maintenance reserve… at least where I live in Florida - but we have really high insurance rates. So you are often looking for a needle in a haystack to begin with.

But - when looking - you need to know what a “typical property will rent for - so let’s call that a 2/1 house that is around 800-1000sf. When you see something bigger, or smaller you just know you need to adjust for those factors… more bedrooms, more square footage will rent for a little more. So go to Zillow rentals and figure out what that rents for… in my area that’s around $1.15/sqft or around $1150/month.

From there it’s a math equation… $1150 minus principle, interest, taxes, insurance and $100 maintenance reserve equals my expected cash flow.

That same house sells for $145,000 in my area. If I’m putting 20% down, that’s $29,000 down and I’m financing $116,000. Let’s call the interest rate 7%. So Principle & interest will be $772. You can look up the taxes on your local property appraiser’s website. Let’s call it $1,500/year. You can call an insurance company for a real quote, but let’s say $1,000/year on insurance. So the taxes and insurance equal $208/month, and the maintenance reserve is $100. All those added together equal $1081/month… giving you a net cash flow (on a good month) of $69. That’s a crappy deal… and not worth pursuing. So you log that number in your head - that at $145,000 you have $69 cash flow when rates are at 7%.

But if rates were at 5%, your payment drops to $623 for the P&I instead of the $772. That’s $149 better - giving you $218/month cash flow. That’s average /descent in my area… not great… but perhaps worth pursuing. What if you could get an extra $100/month on your rental because it’s in a better part of town? Now you are at $318/month. That’s now pretty good for a financed property.

You will get good enough that you will be able to run these calculations in less than 2 minutes for a ballpark estimate on a house you are looking at.  So it becomes a quick - back of the napkin exercise as you look at properties wherever you find them.

So the lessons here are that until rates come down, most houses for sale at current market rates will not cash flow (well) where they are worth buying in todays market. But rates are expected to drop in the coming few months as the Fed lets up on their interest rates. The fed meets 8 times a year. If they cut 1/4 point per meeting rates could come down by 2 points in a year. (Not that they actually set mortgage rates - but they influence them.)

You now know that as you look at 2/1 houses that anything priced near or above $145,000 isn’t worth pursuing in the short term… so you look for ones that are cheaper than that.

You can go to Redfin.com and put a search area in “list view” - versus map view and it will let you sort that area by all the table headers in the list - so you can sort them by $$/sqft for instance. This realistically gives you the cheapest houses in order in that area. Note that it doesn’t take house condition into consideration, so there is still other due diligence required - but this is a great way to look for the most affordable houses in a given area. You can then click into any of them to view them further.

So go and look for 2/1’s that are cheaper than the $145,000 one we already figured out won’t work well right now.

That’s one path to house hunting. For more adventurous ones - we have bought houses off of Craigslist, from foreclosure sales, from wholesalers , and even found a seller we were buying her house from had another one she was willing to sell us at the closing table! There are a lot of paths you can chase… but for market searches, the above is what I do.

All the best!

randy

Joe Villeneuve · Answer

Your first mistake, is you're analyzing one deal per day.  That's a waste of time.  You should be analyzing markets.  That way you are analyzing every property within that market, so when a property comes up for sale, your analysis of that property is already done.

When you have a single property offered to you, you are still analyzing the market that property is in.  Never just analyze properties, analyze markets.  When you buy a property, you are not simply buying a property, you are analyzing a piece of a market.  The value of any and every property, is a result of the numbers that come from the market that property is in.

Alecia Loveless · Answer

@Rowan Klecker One big factor to consider in my market is the property taxes because a $200,000 property could have taxes of $2000 or $5000. The same discrepancy may not be true in other markets.

I also look for cash flow and try to keep it at a minimum at $200/door/month. That’s the lowest cash flow I’d likely consider unless there was another reason I liked the property. For instance I was just under contract on a duplex that at best cash flowed $363/month. It was under my metric but the property was right next door to another property I own so I figured certain maintenance issues could be lumped together for economies of scale making it a better deal in the long run. (For transparency this deal fell apart due to an issue with the inspection that the Seller and I couldn’t reach an agreement on).

I have a market of about a radius of 50 miles that encompasses several towns. I tend to analyze any SFH or multi that comes on the market and fits my price criteria. I get my preferred agent to send me the full MLS listing that I couldn’t otherwise see. I then do my research and analyze the deal primarily using BP Calculators. If and only if it meets my criteria and expectations will I schedule a showing so I’m not totally wasting my agents time. Then 95% of the time my contractor goes to the initial showing with me. Then afterwards we make a plan based on potentially necessary renovations and decide together if I should make an offer.

Fast forward to if the offer is accepted I ALWAYS get a property inspection. Prior to Covid I had a lot of luck renegotiating purchase prices based on problems in the inspection. Post Covid the market is just so hot I’m usually only able to get something fixed if it’s a terrible problem but nothing off the price.

This is how I evaluate and proceed through a deal.

Rowan Klecker · Answer

Thank you! This is gives me a better insight into the real real estate investing world instead of trying to do it on my own based off of what I have read!

Gino Barbaro · Answer

@Rowan Klecker

I think you need to have a good understanding of the market you are underwriting. What is the income/expenses of the asset. NO rules of thumb.

Then you need to create your own buy right criteria: Age of asset, unit mix, median income, amenities, etc. Try to get clear on the type of assets you want to invest in.

If the deal hits my metrics of cash on cash, and DSCR, it warrants a deeper look. Underwriting is a science. The T12 reads like a story, and once you leanr how to understand a t12 and the rent roll, underwriting becomes much easier

Buy on pro forma (yours) borrow on actuals.

Gino

Bradley Buxton · Answer

@Rowan Klecker

Keep looking at deals and then calculate in the exit plan. Are you keeping for 3,5,10,20 years? What will you do when it's time to exit.  Are you calculating in value adds? What is the city or area doing interns of development? Are there 5000 apartments coming on in 5 years?  Will there be new inventory close to your assets that might affect the rents or appreciation.  A good or bad deal can be more than just the numbers of the day.

Tim Ryan · Answer

My criteria is:  are you looking in a "growth market".  What will be the future appreciation and rent increases of these properties? Once you know you have selected the best market, then analyzing the deals comes next. First step is the 1% rule minimum.

Jonathan Greene · Answer

Are you seeing properties or just doing online analysis of homes or properties or deals you haven't seen? If you are new, this is the actual prescription for analysis paralysis. How can you analyze a deal if you don't know what the numbers mean and haven't seen the property? You are just trusting the numbers of an online deal? That won't help you learn anything.

Rowan Klecker · Answer

For now, yes, I am only looking at online listings and foreclosure websites. I do understand that there is a limited amount you can really know about a property without being there, which is why I am curious about the processes experienced investors go through. Given my age, I am really limited in what I can physically do so I am trying to further my education anyway I can!

What is Your Process When Analyzing Deals?

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