Reality Check: 20% discounts, 10% appreciation, 2% cash flow?

[Account Closed]

I am new here, and along with the Bigger Pockets guides, I recently read Brandon Turner's "7 Years to 7 Figures."  That piece lays out 3 fundamental principles: get a good deal when you buy (20% discount), appreciate the property early on (10%+), and ensure a certain level of cash flow (2%+).  I appreciate the article and understand the principles at play, but I find the specific number goals to be unrealistic.  I'm hoping that's just from my lack of experience, but I'd like some insight before I jump into this market.

First, something is seriously wrong with a market if a person can ever (let alone consistently) get a 20% discount. If a property is listed at $100k and you get it for $80k, that means that either the property was never actually worth $100k, or that the seller was wildly misinformed or under severe duress.  Maybe this business plan hinges on restricting your search only to the latter situations; indeed, he says that "less than 1% of properties currently for sale are worth buying."  If smart, Bigger-Pockets-reading real estate investors require a 20% discount, and only 1% of the properties for sale meet that criteria, won't there be competition for those properties, which will drive their price back up?  Again, I don't intend to be a nay-sayer; I'm just new to this and don't see practical, repeatable, consistent ways to find 20% discounts on properties -- please fill me in!

Second, I don't understand how one can "force 10% appreciation" under the circumstances described.  If I buy a $100k property, and my only investment is the $20k down payment, how do I make the property $10k more valuable?  I guess it's assuming that you bought the property for $80k, so your 20% down payment was actually only $16k, giving your $4k to make improvements.  But I see two problems with this.  First, this assumes a 20% discount (see question #1).  Second, this assumes that you can spend $4k on improvements and get somebody to believe that its a $10k improvement, which again, assumes that someone is misinformed.  Am I misunderstanding?

Third, the plan assumes that you can earn $200 cash flow.  As I understand the material on Bigger Pockets, you charge rent, save half for reserves/repairs, then use the other half to pay the mortgage, and what's left over from that second half is your cash flow.  If we bought a $100k home with $20k down at 5% interest, the mortgage/tax/insurance would be roughly $600/month.  To assure $200 cash flow, the rent price would have to be $1600/month: half ($800) for reserves/repairs, and the other half used to pay $600 mortgage to allow $200 cash flow remaining.  I'm sorry, but the $100k homes that I'm looking at on Zillow will never, ever rent for $1600. 

Again, I'm not trying to be difficult or argumentative.  But, before I make a plan and commit capital, I need to know that the principles work out in realistic, real world dollars and cents.   Any help is appreciated!      

[Andrew Johnson]

@Account Closed I'm not sure if this will 100% help but most everything in real estate has metrics like these:  20%, 10%, and 2%.  I look at anything out there that's stated as a "rule" as more of a "goal".  A you gain more time on BP you'll see constant reference to the 50% rule, 1% rule, various guidelines as far as cash-on-cash return goals, etc.  What you'll then see if the pseudo-arguments breakout about using the 50% rule in a super high rent area like San Francisco.  Then you'll see others argue that you'll never find a 1% property in Los Angeles.  Someone else will jump in an talk about 2% cash-flow deals "all day long" in a Memphis warzone.  The truth is that very few of these "rules" are universally applicable.  What complicates life further is that you have full-time investors that market (hint: it's not free to market) to find the best deals, which are often off-market.  Those marketing costs are never taken into account when it comes to the "20% discount" structure.  So the net result is that you don't have an apples-to-apples comparison.  The same comes to rehab costs, if they have preexisting relationships with quality vendors, some kind of discount because they use them a ton, then their $4K will go farther than your $4K.  You have the create the wheel, they have a flywheel.   If they run their own in-house property management company the costs might balance out to 7% of gross rents when you have to use a 3rd party vendor at 10% of gross rents.  Again, bottom line, it's just not apples-to-apples in all cases.  

What's important (in my opinion) is that you look at your preferred market and come up with the deal terms (cash-flow dollars, cash-on-cash return, etc.) that work for *you*.  

You might want a fixer, I don't, so the "same fixer deal" on paper is actually "worth" more to you than to me. So here's what I don't know. I have no idea of what "good" deal looks like in Maine. If that's where you want to live, stay, retire and the ROI metrics are anywhere close to what you want: buy there. Keep your life simple. If you buy that $200/month cash-flow rental in Oklahoma City and you want to visit it twice a year you stand a good chance of blowing that $2400 annual cash-flow on plane tickets, car rentals, hotels, food, etc. Maybe you wouldn't, but I probably would. Certain things (again, my personal opinion) like out of state investing get materially better with scale. And others are happy never to visit their out of state properties, I couldn't do that. Not to mention that it's not exactly an easy proposition for a rookie to manage a value-add rehab out of state. That's a whole other ball of wax...

I hope this helps...