How to tell if something is a good deal?

Question

Hello Everyone,How am i supposed to tell if something is a good deal?  What numbers are your rule of thumb?  I am able to add up all the bills to figure out what i would have to pay each month, as well as see what i will need to bring in each month.  Realistically I am curious on how much profit each month is enough profit?  Do you do your numbers based on a 30 year mortgage or on a ten year mortgage.  Right now i currently own a single family home with 5 bedrooms, rent to college kids at 2000 per semester.  Bring in about 23000 per year, but i did a ten year mortgage instead of a 30 because i wanted to get it paid off and start rolling.  only had it for about 4 months and haven't made it through a whole school year yet but it seems to be going well.  Not any extra income yet but it is really paying for itself which makes me happy but isn't generating anything to purchase anything new.  Any thoughts on these?

Thomas S. · Answer

Study and learn, it is a huge topic that takes a long time and in-depth research to get a handle on. Most investors would do the research and study prior to investing.

It is a vast and complex topic not learned simply by asking questions.

This site, internet and the public library are full of resource information you should be studying.

You will likely get suggestions on what reading to start with.

Account Closed · Answer

That is too low.. the average price of an SFR in the country is in the $200,000 range. A mortgage in that range hanging over your head just to net $100 per month wouldnt be worth the headache.

Lucas Machado · Answer

@Jerrad Dumont Consider cash flow, capitalization rate, cash-on-cash return.  I'm not huge on rentals, but when I am using them in the shorter term, I would look at each of those and make an assumption as to the how much on-going costs will be, in terms of insurance, taxes, wear and tear, utilities, vacancy. These will vary property to property, neighborhood to neighborhood, age of the property and certain aspects. Replacing things like a roof and central cooling aren't cheap. I would also not simply look at your current rent numbers, I also look at the market numbers in the case of vacancy.

I also don't look at in terms of just my rental returns. Depending on your neighborhood, things like cap rate can be incredibly high (war zone), or fairly low (luxury properties). Doesn't necessarily mean one is better than the other. For example, in my geography - Miami-Dade, Broward, Palm Beach County in South Florida, areas like Wynwood and Coral Gables have property values substantially higher than any cap rate rental number you could ever look at. Doesn't mean it isn't a great deal now or the foreseable future. In fact, you could treat them as flips, wholesales, etc. If your in this for the long term, and the municipality is pumping serious money into the area you're looking at, you could make a substantial amount of money on appreciation. Look up the Community Redevelopment Associations in you area. A good deal "numbers" in a CRA, in my view, is a great deal when balanced with the real world of a government subsidizing the that area of the city.

This also goes to another point in terms of my recent evaluation of rental strategy. If we're at the top of the market currently, it's not necessarily a "great time" to accumulate a large amount of rentals - I'm not saying don't buy a rental. I'm saying, you think a cap rate of say 10% is great for your market - and your investing in that number. One day, perhaps in the near to semi-near future, you may wish to sell that property. If the market corrects or has a reduction, all of a sudden, you're rental is worth substantially less in terms of re-sale and your for all intents and purposes tied to it.

Anyways, I'm no rental pro - but I'm looking to expand in this area and this is how I am looking at it. If your strategy is simply what every other investor on the planet is looking at and bidding on, going to be tough to find great deals (at least in my market, where people buy things at low cap rates or well over market values). If you can see the bigger picture that other investors aren't necessarily seeing, that's where the "gold is" as general business perspective applicable across all industries.

As an example, I recently purchased a property which may turn out to be nearly a 100% ROI flip. Essentially, there was paying tenant (but paying late alot) in a luxury building with a $1,500 HOA (boat access, crazy amenities) - but with the level of rent it was $1,000 or so loss every month. No landlord was willing to buy it to lose $1,000 per month (and it got floated on wholesale lists like 10x). No regular homeowner was willing to buy to lose $1,000 every month and to possibly move in. Typical flippers weren't going to get involved with a 10-month lease to lose $1k every month. It was in pretty good shape so really I knew I could fix it up for around $25,000 (I did a GC walkthrough with GC specializing in condos). Anyway, I took the risk and negotiated with the tenant post-closing and made it clear that i can pay him $5,000 now to find a new place and cancel his lease, or he can wait till the end and then he will leave. He agreed to the $5,000 - and now I perhaps have the largest flip I've ever done.

Account Closed · Answer

You kidding right? In many areas you have a hard time cash flowing with a 30 year term, suggesting 10 years is trying to amplify the negative cash flow per month significantly.

Mitchell Jaworski · Answer

@Jerrad Dumont - a lot of it is based on your goals.   The 10 yr mortgage will get you free and clear much sooner, but obviously will cash flow less in that first 10 years.   On the flipside, you will get the property at a much cheaper overall cost because you are paying it off 20 years sooner.

As for what an acceptable return is - it is subjective.  Some people want cash on cash of 12% or better, some are happy with getting 8% because it matches the historical average of the stock market.

Many variables that go into it.  You should use a property calculator to run your numbers always though.  I made a simple one in excel that I use.  PM me if you want it, it's out on my blog.

John Thedford · Answer

It's OK to look at cap rates, but SFR do not trade on them. I look for appreciation (as a bonus), cash flow, and market rents. I prefer newer properties. I just blew through 17K in new roofs, $3100 for a new A/C, and am in the process of two rehabs. So, cash reserves can disappear overnight. Having them is VERY important. I always pay my tax bills timely to get the reduced rates, and always have extra money for emergencies. Rentals are great for building sustainable income. They take time, management skills, etc. There is no magic formula. RE is a numbers game. Some deals work and others won't. If the numbers don't work, don't try to force them and deceive yourself into buying bad deals. Don't buy just to buy-buy what makes sense.

Account Closed · Answer

If rental cash flow is your goal, that usually means positive monthly cash flow from the property. Your mortgage payment amount makes a huge difference if you cash flow or not and so does expenses. The difference between the payments on a 10 year mortgage and 30years can be towns apart. A 10 year mortgage isnt an excuse to raise rent.

Using an SFR for instance, if you are to cash flow, rent at a minimum should equal:

Rent=Mortgage payment + Operating Expenses + Required Monthly CF

or

Rent=Total Expenses + Required Monthly CF

If you are told any different, the objective isnt CF.

What you will also find is that in many markets, the market rate (what people can pay) for rent may be lower than just the mortgage payment alone or lower than total expenses (mortgage payment + operating expenses), in which case you will have a negative CF -- translation, find a property that actually does CF.

How to tell if something is a good deal?

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