Why So Obsessed With Finding a "Good Deal"?

Investor · Hagerstown, MD · Member since 2014 · 299 posts · 140 votes

11y

@Tom Scott I think that $100-$200/door is a "good deal"! I would say that most properties are priced for owner occupants, and so a buy and hold investor usually cannot make it cash flow at the listed price. You would have to get a property well below market in order to make that $100-$200/door.

I look for at least 8-10% ROI (cash on cash return) for any of my deals to make sense.

My .02 cents.

1 Reply

Elizabeth Colegrove

Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes

11y

A good deal is "my" opinion is access when everything is done. You want to look at your true profit when you access your time and everything else.

That being said, most people believe you make your money, the day you close not the deal.

While I definitely believe that is important. It is easier to be successful with equity than over market!

You are only truly successful when you have closed and look at your whole portfolio.

So someone that gets 3 bases every swing is going to do better than one home run a season :)

So you need to weigh everything and get your plan/goal!

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David Barr

Venice, FL · Member since 2015 · 34 posts · 3 votes

11y

Don't forget to take appreciation into account.

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Account Closed

Real Estate Investor · San Antonio, TX · Member since 2014 · 785 posts · 190 votes

11y

I guess a good deal is in the eyes of the beholder :) We make good money in our city in the Lone Star state by making 5k-10 per deal. Lots of those is real money, as is a 12% cap rate without property maint for the investor!

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Seth Wilson

Specialist · Kansas City, MO · Member since 2010 · 71 posts · 27 votes

11y

Diffrent strokes for diffrent folks!

What's your strategy? What's your plan both short and long term?

It is completely subjective.

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Nathan Emmert

Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes

11y

Simple answer... for most, cash is a finite resource... and cash often limits your ability to take advantage of deals. With that said, they want to utilize their limited resource in the most efficient way possible.

If you're able to buy 100% financed... creative financing... seller financing, whatever... the rules may change... but the more traditional, conventional/bank financed 25% down investor is going to have to maximize the use of their cash.

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Mike F.

Investor · Denver, CO · Member since 2015 · 570 posts · 521 votes

11y

If you're a buy and hold investor looking at creating a long term rental property portfolio, the "good deal' should be tempered with not being blinded to seeing long term into the future.

Many 'good deals' are good deals because of where they are located, marginal neighborhoods. Those aren't good deals to me for a long term buy and hold investor because those properties in distressed neighborhoods no matter how nicely you fix them up are not going to rent to anyone other than a 'distressed' human being, and they bring you all their baggage and all their headaches of managing them.

As a long term investor I want a property in a stable, strong, neighborhood that I would live in. That property is a long term property for the next 10, 20, 30 years and will appreciate in value far out pacing those 'good deal' properties that exist in those crappy neighborhoods.

You get what you pay for and real estate is no different, I'd rather buy the crappiest property in the nicest neighborhood and pay too much for it than an average house in a crappy neighborhood.

3 Reply

Loren Thomas

Electrician · Bothell, WA · Member since 2014 · 241 posts · 96 votes

11y

I like this thread. It's a little discouraging seeing how much more difficult it is in areas that are expensive. I've also pondered taking the hit for long term goals.

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Matthew Paul

Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes

11y

Good deals in nice areas on houses that need very little , they dont happen very often. Especially if it gets in the hands of a real estate agent . Agents want to see the prices stay up high , so that comps stay high , so their commissions stay high . Every good deal I have gotten in nice areas was word of mouth or dumb luck , and they all needed lots of work .

1 Reply

Jeff Rabinowitz

Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes

11y

You do not have to buy below market value to do well. When I decided I wanted to build a rental portfolio (this was SFHs) I paid market price, maybe a little higher in a couple instances. I knew people who made one hundred low ball offers hoping to get one accepted. Sometimes they bought one but mostly, they spent a lot of time making offers. I bought most, (not all), of the properties I made offers on. You have to successfully buy the property in order to operate the property. I have since picked up a few properties at below market prices but I was happy to pay market price for the ones I wanted.

2 Reply

Mark Forest

Real Estate Investor · Fenton, MI · Member since 2008 · 946 posts · 153 votes

11y

Originally posted by @Tom Scott:

A "good deal" is one in which you can purchase a property below market for some reason, or purchase and then rehab or better manage it, which will in turn allow raising of rents and therefore increase the market value of the property and equity. For lack of a better term I would say that most of these properties would be distressed.

Yes, I have thought this way for a while now. First fair market value is subjective since most properties have different pro/con. I have heard it said one MUST get 20% below fair market value or it wont work. Really? How do you know for sure the fair market value? It is just an estimate.

Even those properties that are distressed will cost more time and money to fix. Now if the issue is poor management a better landlord can do well. But if the place has such bad deferred maintenance it is very easy to go over budget.

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Kyle Hipp

Investor · Appleton, WI · Member since 2012 · 1k+ posts · 464 votes

11y

The way I see it is that I have limited resources. We all share he same limitation of Time being 24 hours in a day. I have limited capital and a certain skills. I need to maximize my time in order to expand my capital and skill which allow for leverage. So I cannot afford to waste my time collecting marginal deals as this will take away from my limited time to gain maximum capital and skills. I work a full time job (50+ hours a week) which provides a good income and benefits to support my but also limits my time as I grow my rental portfolio. My goal is to retire from my day job by age 40 within 10 years. So my investments must further that goal. This is why I try to only buy "good deals". Once I retire, I will have more time, then marginal deals that the fill the day might make more sense.

2 Reply

Diem Tran

Investor · Miami, FL · Member since 2014 · 47 posts · 5 votes

11y

@Tom Scott Thank you for starting this discussion!!! You took the words right out of my thoughts, of course, you put it in writing better than I ever could have! I, like you, have a full time job, and would like to invest also. My problem is that I wouldn't know where to start with a distressed property anyways. I'd probably end up spending more money on the rehab than paying retail price on a turnkey. So I always thought then "what's wrong with buying a turnkey retailed priced multifamily property?" Am I wrong to think that I could pay a little more now, settle for less cash flow for the first few years, and raise rents from year to year and then benefit from there? Am I doing the math wrong?

Anyone with suggestions or advice, please chime in! Thanks

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Loren Thomas

Electrician · Bothell, WA · Member since 2014 · 241 posts · 96 votes

11y

@Diem Tran I agree with what you've said there.

So here's an on topic question, how much cash flow becomes an "acceptable" figure if it's not a "good deal"?

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Brent Coombs

Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes

11y

@Tom Scott My short answer is:- why would you buy anything that you didn't consider a "good deal" (regardless of whether it was a supposed discount, or not)?

And if you find plenty of retail buying opportunities where your modest positive cash flow needs are fulfilled, why don't you buy ALL the ones your funds allow? Cheers...

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Jennifer Lee

Real Estate Broker · Gibsonia, PA · Member since 2013 · 828 posts · 260 votes

11y

i don't see my transactions as "good deals"

I see it as "buying right" or "buying wrong"

When you buy right... Everything falls into place. And you have holding power.

It all stems from doing proper due diligence before buying...

My definition of buy right:

LOCATION : location location,

Desirability, school, lot shape and size, lot location... Things you can not change and/or have no control over. Future development that may impact area. Tenant population that u are comfortable with.

PRICING: did u buy at the right price? Is you rehab numbers correct? Is your anticipated rent correct? Buy with worst case scenario in mind? Is your ARV accurate?

TIMING: not just market timing, but are you able to put time and effort into it. Do you need Holding power?

FINANCING: do you have hold power? Are you comfortable with the terms? Do you understand the terms? Did you anticipate the holding cost, cost of money? Are you using money that you need to live on?

INTEL: Did you do your due diligence? Boundary, easement, environmental test? Inspections, repairs and deferred maintenance? Title issues. Are all things that you can find prior to closing.

4 Reply

Robert Leonard

Investor · Lafayette/Baton Rouge, LA · Member since 2013 · 1k+ posts · 915 votes

11y

For me it's simple. If there are "good deals" as you defined them (with a focus on being undervalued) available, why would I pay full price? If I can make the same returns on 2-3 deals that takes others 4-5 deals, I choose 2-3. If there weren't deals available that allowed me to "make my money when I buy" I would buy deals at retail. I get outbid for properties all the time (not by the hundreds of offers), by investors who accept lower margins. Sure they will still make money, but as long as there are properties that I am successfully buying at much more profitable margins, I'll limit my MAO to my criteria until I'm unable to buy anymore, then I'll switch my criteria. Or I just won't buy.

I don't consider it an obsession. I consider it discipline.

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Account Closed

Minneapolis, MN · Member since 2014 · 332 posts · 288 votes

11y

Another, and probably one of the most important, is cost of capital. For example, our company buys large multifamily properties, usually 200+ units per transaction. These deals usually cost between $15-20 million. We need to raise or have previously raised the equity to do these deals. The marketplace is paying equity investors 6-7% preferred returns right now. That means for us to raise the $4-5 million in equity we need to do each deal, we have to find deals that make MORE than a 7% return for us to be able to make money, since we are paying the equity investors 7%. If we buy a deal with a 5% return, we lose money. Alternatively, if we put 100% of the equity in each deal ourselves and didn't need/have investors, we could settle for whatever return we wanted. But most people don't have that kind of cash laying around. If you are buying a single family house and using your own money, you can take whatever return works for you. Also, you need to compare the returns of the investment to alternatives. Today, there's not many other safe ways to get 7%, but there used to be a time when you could put that cash in savings or a CD and earn 3-4%. So why would someone take all the risk of buying a multifamily deal at 5% when they could earn a risk free 4% in a CD?

2 Reply

Rick SteinPro Member

Investor · Austin, TX · Member since 2014 · 248 posts · 181 votes

11y

In purchasing buy and hold properties, I am willing to pay even marker at value if I can get good terms. I own several properties utilizing seller financing. Would you rather borrow $100,000 at 6% or $120,000 at 4%. I won't pay more than market, but if the numbers work at market value, that's fine with me. Cash flow is king! By the way, $100 per door won't cut it for me. When the tenants move out and you and you replace the carpet, paint, etc, that money will be spent and then some. I am looking for a minimum of $300/door.

2 Reply

Bill Gulley

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

11y

Originally posted by @Tom Scott:

I've been studying everything I can get my hands on about buying and owning multifamily properties. The one thing I keep seeing is that people will only buy if it's a "good deal". Now, I of course understand that that term is subjective and greatly depends on the buyers goals and criteria but for the purpose of this post I will describe it as I have most often seen/heard a "good deal" described. A "good deal" is one in which you can purchase a property below market for some reason, or purchase and then rehab or better manage it, which will in turn allow raising of rents and therefore increase the market value of the property and equity. For lack of a better term I would say that most of these properties would be distressed.

Hearing this over and over, I started to question the validity of the practice of only buying a "good deal". It would seem to me that buying a cash flowing property, in good condition at market value, assuming 25% down and the rest financed in your preferred way, while obviously not profitable as the deeply discounted property, would still be a good choice as long as the cash flow was adequate to your needs/criteria (maybe $100-$200 a door). The reason I say this is even though you cannot gain equity immediately through rehab and raising rents, you can still gain it slowly due to the fact that your renters are paying your mortgage for you.

Just to be clear, I am not saying that buying distressed is bad. In fact just the opposite, it's great. I am however saying that turning away deals because they aren't distressed may be a mistake, or at least that's my line of reasoning at this time.

Also, it would seem to reason that, in the case of poor condition and mismanagement, a lot of work needs to be put in on the front end to get the property up to snuff and cash flowing to its potential. This might be a pretty tall order for investors like myself whom currently hold down a day job and invest on the side. Less headaches may just be a welcome thing for those of us struggling to manage a job and a portfolio.

Tell me what you think, am I right? Am I wrong? Am I somewhere in between? I'd love to hear some feed back.

Tom, you're absolutely correct! If those that chase the "deal" from the rules of thumb advocated here they will be doing a lot less business than if they learn to buy wisely with better RE knowledge.

I never saw so much emphasis on buying at 70% of "value" or other low ball tactics before I got to BP. While I've been active in the community, being in a good position to spot distressed properties or situations, most of my properties were purchased near or even at the asking price, a few at even a higher price.

Folks are guruized ! It's where they learn, Long term investing and investing in potential isn't taught to my knowledge by the "common guru", it's much easier to tell the stories of that great deal, buying at 50% of their perceived value and making a killing (using any means necessary BTW) which sells the myth of real estate investing.

If you think about it, you don't buy stock at discounted prices below what the market commands, the profit is made by identifying "market values" that have greater potential. There are distressed stocks, undervalued due to various factors, but that is part of selecting those with greater potential for future performance. Same with any asset and that includes real estate! Yes, there are tactics of stock swaps, consolidations, liquidations, puts and calls that leverage a better deal, but stocks are generally sold at their "buy price" they are not negotiated down by your broker.

I could go on about investors and operators, active and passive investing, but seems 99% here like the guru version of "investing" and that requires finding their below market prices. It's taken a couple years to get the idea of distressed sales across to our BP newbies, catching on, until folks begin understand RE basics and aspects of value, we'll be hearing more fluff to base their expectations. Thanks for posting the topic! :)

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Jesse T.

Herndon, VA · Member since 2014 · 1k+ posts · 324 votes

11y

You might be able to "buy high" and buy and hold a rental property. However an inflated purchase price(or in many cases even full retail) will force you to use that strategy.

"Buy low and Sell high" is the goal(in addition to income) of any investment. However due to high transaction costs, it can be difficult to correct poor purchases. If you overpay for a stock you can sell, take your loss and buy something better. Say you pay 50K for a stock that is only worth 40K. You still will have 40K to buy a better stock. Let's say you put 50K into an investment property you buy for 200K. It turns out the property is worth only 180K. If you get out and take 10% transactions fees(commission, closing costs, carrying costs) you only net 162K - which means you only have 12K remaining to re-invest. The stock does worse(20% decline) but your down-side isn't as bad since you aren't leveraged and the transaction costs are small.

If you flip the situation. Buying 54K in stock for 45K will net you a nice 20% return. If you buy at a 10% discount with the real estate. Get a 200K property for 180K. Transaction costs would eat up the profit, but you would be sitting at 65K in equity - 15K which could be pulled out by refinancing.

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Larry Turowski

Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes

11y

@Tom Scott It's the same reason you buy a car from the dealer that gives you the best price (all other things being equal).

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Bill Gulley

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

11y

Jesse, you can't buy 54K "worth" of stock for 45K.

I'll read posts prior to mine later.

Yes, you can buy a new car and drive it for 15 years and be ahead.

BP NOT RESPONDING AGAIN! :(

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Steve Olafson

Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes

11y

@Tom Scott

You have described my process. I have made a lot of money using it.

Let's say that I buy a 25 unit property for 1.2M and it generates 30K/year in income. That is good right?

What if I bought a 25 unit property that needs some work for 800K. But I have to put 50K into the deal to make it work. So I do some work updating the units and increasing the rents. I probably won't make much cashflow from this for a while because of the work and such.

Now when I am done I sell the much nicer property and net 1.2M after cost of sale and such. I made 350K compared to 30K.

Which would you rather have?

I bought a property in Corpus Christi and owned it for 13 years. I made some cashflow off of it but every few years I was needing to put large chunks of money into it for roofs, parking lot, a/c's, etc. It was a 29 unit property and the original price was $875K. This place was in an excellent location close to the bay and along side million dollar homes. After 13 years, it was sold for $950K. The rental market had gone through ups and downs. Very little money was made on this deal after all these years.

Let's compare this to another deal. 24 units in Scottsdale AZ purchased out of a non-profit liquidation sale. They were about to go bankrupt. The property was less than half occupied at the time but did not need a lot of money for capital outlays. Paid $500K for the deal and was able to get hard money for the whole thing (since it was such a great deal). It was sold for 1.5M one year later.

That is my comparison.

2 Reply

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

11y

I seek distressed sellers, not so much distressed properties. I like to help solve problems usually for long-time landlords that are tired or want change. If the value isn't there, no way. This is like any investment and there is an opportunity cost for my money. If the returns aren't well above what I can earn with reasonable levels of risk in the paper asset (stock/bond) market, I will not buy an apt building with it's increased hassle factor. Never had a stock or bond call me in the middle of the night with drama and toilet problems!

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Why So Obsessed With Finding a "Good Deal"?

Why So Obsessed With Finding a "Good Deal"?

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