Where the H3LL do I find a deal!?

WHERE THE HELL DO I FIND A DEAL?!

This post assumes you have already made the decision to pursue a greater level of financial flexibility through real estate investing (REI). It also assumes that you do not already have a steady stream of possible deals flowing across your desk. That means that you and I are in the same boat. We spend a lot of time thinking about question #1: Where do I find a friggin’ deal!?

What you are about to read is a collection of my thoughts and limited experience answering this question. I am a sophomore real estate investor at best and do not pretend to understand the entire ecosystem of REI deal prospecting. However, if you start with and stick to these steps, I am confident that you will A) have initial success uncovering possible deals and B) discover other doors of opportunity.

Here we go.

STEP 1: Figure out what you are trying to do. This step includes several sub-steps:

Determine your goals I.e. early retirement, regular retirement, subsidize current lifestyle, piles of cash for other ventures, etc. Answering this question will help you determine how much cash flow you need and how much time you have to achieve it. This is a crucial step in determining your ideal REI strategy.

Find your place on the time/money continuum. Your available time and initial capital you will dictate which REI strategies make sense. See rudimentary chart (Figure 1) below for a sense of where each strategy falls. Once you select an ideal strategy, it will become clearer what kind of deals you are searching for. Please note that your ideal strategy can and I likely will change as you go along.

STEP 2: Understand REI marketing tactics. Now that you have a sense of which REI strategy makes sense for you, let’s introduce some general deal finding tactics. There are two main buckets of deal finding and they are Direct to Seller Marketing and Networking. Both are discussed below.

Direct to Seller Marketing: This can be the most expense form of prospecting and may include a mix of active and passive marketing tactics. Each type is explained below with examples.

Passive marketing: General or targeted marketing aimed at achieving calls from sellers who are interested in selling a house. This may include bandit signs, billboards, TV ads, radio ads, search engine optimization (SEO), social media ads and mailers. In short, you are advertising your interest in buying houses and waiting for the phone to ring.

Active marketing: Identifying and connecting with possible sellers to see if they want to sell their house. This type of marketing may include purchasing or compiling lead lists. For instance probate lists, tax lien lists and pre-foreclosure lists. It may also include driving around town, identifying distressed properties and finding the owner’s contact information. In theory, the owners of the property on these lists are experiencing some level of pain and may want to sell a house. You call them and offer to purchase their house. This may be the solution they need.

Networking: This may be a less expensive form of prospecting and generally entails getting out into the real estate community, connecting with people who may come across good deals and letting them all know what you are looking for. This could include:

• Attending meetups
• Connecting with real estate agents
• Utilizing social media platforms (i.e. Bigger Pockets)
• Treating other real estate professionals to coffee
• Reaching out to wholesalers and requesting your email be added to their buyers’ list
• Offering services to people/organizations who often encounter people with houses to sell (i.e. nursing home/assisted living facility administrators, probate attorneys, CPAs, mortgage companies and community bankers.)

Here are two important notes about networking. 1) Focus on what you can do for them and how you can help them in their business. If you can help them be successful, they are more likely to reciprocate. 2) Select 3-5 mutually beneficial relationships and focus on them. You can easily spread yourself too thin and be no good to anybody.

STEP 3: Determine which deal finding tactics may work best for your specific REI strategy. Now that you understand these general deal finding tactics, let’s dive into which tactics may make the most sense for specific REI strategies. We will use the four REI strategies in Figure 1 (Turnkey Rentals, Assigning/”Wholesaling”, Flipping and BRRRRing). Let’s also briefly address financial criteria you may evaluate in each of these strategies.

Turnkey Rentals: In general, this strategy involves purchasing a rental property that needs little to no rehab. Normally, you can and will purchase a turnkey rental property on a conventional loan with 20-25% down or fund the entire purchase price with your own cash. (There are always other ways to finance REI deals, but these are the most common.)

Possible deal finding tactics include searching for turnkey rental properties on the MLS or through turnkey rental providers. If turnkey rental property is part of your REI strategy, you will want to add 3-5 turnkey rental property providers and real estate agents to your network. They will help you shape your deal selection criteria and should be able to start sending you deals immediately!

The financial criteria for a turnkey rental property investor may revolve mostly around cash flow. The formula is quite simple: A reasonable estimate of market rent – expenses = cash flow. Expenses may include your mortgage (principal and interest) if applicable, insurance, taxes, property management, maintenance/maintenance savings and capital expenditures/capital expenditure savings.

Assigning/“Wholesaling”: This strategy includes going into contract with a seller at a discounted price and either selling the contract rights to another real estate investor at a margin or purchasing the property and immediately selling to another investor at a margin. This often requires marketing directly to sellers.

Possible deal finding tactics include a mix of passive and direct marketing tactics discussed above. You might focus on building a network of people/organizations who often encounter potential sellers (also discussed above). Your goal is to get houses under contract at the steepest discounts possible. To do this, there can be no “middle man”. You must do the negotiating directly with the seller of the house.

The financial criteria for this strategy depend on your knowledge of the end buyers’ financial criteria. A good assignor/wholesaler will understand the price at which another real estate investor will need to purchase the property in order to make a profit. This means understanding the market, reasonable ARVs and rehab costs. A general formula for this strategy can be; ARV – estimated rehab cost – the investor’s desired margin - your desired margin = your maximum contract price with the seller. A simpler version can look like this: ARV x 65% - estimated rehab cost.

Flipping: This strategy includes purchasing a distressed property at a price well below retail value, performing the rehab to bring it up to retail value and selling it at retail value. There will often be hard/private money loans involved with these projects. If done properly, this should result in profit. Often times, professional house flippers will have a minimum projected profit for a flip deal and will only select the deals that offer that minimum profit.

Possible deal finding tactics depend on your place on the time/money continuum. House flippers can market direct to sellers with passive and active marketing campaigns. This tactic requires a great deal of time away from managing active rehab projects. Leveraging a network of wholesalers and real estate agents can be less time intensive. Essentially, you rely on your network to spend the time and money marketing to sellers and you purchase directly from them.

The financial criteria for this strategy is simple: ARV – rehab cost – holding costs – closing costs – minimum profit = maximum purchase price. You might also use the formula ARV x 70% - rehab cost = maximum purchase price. This leaves approximately 30% for holding costs, closing costs and profit. Successful house flipping requires your familiarity with ARVs and rehab cost estimation.

BRRRRing: This strategy includes purchasing a distressed property well below retail value, performing the rehab to bring it up to/near retail value, renting the property to a tenant, refinancing out of a hard or private money loan into a long-term mortgage and pulling any initial cash investment out at the same time. It is seemingly more complicated because there are more components, but it is a fantastic wealth-building strategy if you have the required time and initial capital. With this strategy, you are essentially acquiring rental property with little to no personal cash left in the deal.

Possible deal finding tactics are identical to the tactics you may use to find a flip deal.

The financial criteria you may use are a combination of traditional rental property criteria and flipping criteria. Ideally, the property will cash flow once it is rented to a tenant. To estimate the cash flow, you would use the formula detailed in the “Turnkey Rentals” section above. To estimate the maximum purchase price, you may use this formula: ARV x 70% - rehab cost = maximum purchase price. The 70% figure is significant because the best long-term loan you can get on the refinance is for 75% of the retail value. By the time you include closing costs, 70% is a good benchmark for a successful BRRRR deal.

Here is a summary on picture form: