How I Evaluate Deals

Disclosures

Okay, so let's preface this with everyone does deals differently. What works for me, probably won't work exactly for you. Heck, what works for me this month, may not make sense in 6 months.

As we grow as investors, property managers and deal finders, the criteria of what makes a good deal changes. If it's not changing, then you're doing it wrong.

I'm by no means an authority on this topic, I'm just an average guy building a cash flow engine. I highly encourage your criticism and I happily await learning from you all.

Also, I don't work for or receive any benefits from plugging anything in this post. 

Introduction

So the reason I wanted to do this blog post is because I often see bits and pieces of a finding or financing a deal, but rarely the full thought process. I wanted to offer how I look at deals, what I accept and how I mitigate my risk.

I've broken my process into three steps

• Acquiring Targets
• Is it a Deal or a Dump?
• Making the Offer

Every property I evaluate and end up purchasing has gone through these steps and so far I'm 4 for 4 on home run deals. I don't assume that my process can improve, I know it can. That's part of why it's getting documented here. For you all to tear apart and criticize. I want to grow and I also want to help you grow as well. 

So without further rambling, let's dive in.

Step One, Acquiring Targets

I'm a HUGE realtor.com troll. Regardless if I'm looking to buy or not, I'm on there, scanning, watching prices, looking for deals, seeing how agents post things. I don't have an agents license so I don't have direct access to the MLS. This means I need to be diligent when watching what sources I can pull from. Sources like loopnet.com and realtor.com

I hate that I can't filter on number of units. I guess even if I could, there's always going to be some lazy and or not situationally aware, agents that mark 0 units for a 4 family building. I actually see this pretty frequently with other filter options.

To remedy this problem, I usually filter on bathrooms. Though this method isn't perfect, for reasons previously mentioned, it works pretty well. If you filter on 2+ bathrooms and filter on multifamily properties, you tend to get a mix of duplexes or greater back. Same as, if you filter on 4+ bathrooms and multifamily properties, you tend to get quadplexes back.

This is how I find the majority of properties. I know what cities/areas I want to focus on, I have my filters set and I check it daily. If you are checking it daily, another suggestion would be to set the "Days on realtor.com" to "Today" this will filter a lot of the noise out. 

DONT GET TUNNEL VISION THOUGH! It's very easy to miss that diamond in the rough that's been on the market for 250+ days. That's where we can make some deals happen.

Another note on tunnel vision, don't be afraid to scroll outside of your targeted areas just to see how the market is doing. You might find something pop up that you can't let pass by. 

Step Two, Is it a Deal or a Dump?

Okay so now that we have a giant list of properties that we might be interested in buying, lets dig a little deeper into them. To do this, you're going to need some criteria by which you measure each property.

Here's an example of how I measure each property:

• (area dependent) is it within my "price per unit" margin. In a rough area by me, I won't pay more than 22.5k per unit. In a nice area or if the building is completely rehabbed I might be willing to go up to 45k per unit. I came to these numbers by deciding how much do I want to net each month per door. Then I worked backwards to a price per unit.
• What repairs can I see that it needs just from photos posted. Does the total of the repairs I can see, plus the current price, exceed my price per unit line?
• Using rentometer.com, what is the expected rent in the area? I usually like to find the average on that site and expect $100 less than it. If I'm wrong, then I'm happily wrong.
• What will I net? You can find this by figuring out your expenses and taking it from your expected gross (or actual gross if the units are already rented)
  
  • Taxes (look on the county auditor website to verify)
  • Insurance (contact your local agent and ask)
  • Sewage/water/trash? This is dependent on your area but I assume that I'm going to have to pay $50 per unit in water. It's usually less but sometimes more. $50 gets me a benchmark though to start.
  • Capital Expenditures

Now, I can hear the grey beards cringing already. Yes, I know, this isn’t everything. It gets us CLOSE though. We’re just going to try and see if this might be a viable deal, that’s all. We’re thinning the herd down to prime candidates.

Let's look at a real world example:

Property is a fully rented, distressed, four unit building. 

The seller is asking 100k. 

Gross monthly rent is already at it's market level 2200. 

The building needs approximately 20k in repairs after purchase to bring it back to life. Once this is done though, its ARV will be approximately 150k-160k 

Is this a deal?

Well let's look at it as if I plan to finance it with 25% down. 

Required down payment is 25k leaving 75000 to finance. 

This, at a 6% interest rate, works out to ~$896 a month with insurance ($177) and taxes ($270). 

When you add in water ($50 per unit so $200) and trash ($23 per unit so $92) then your total monthly expenses, not including cap ex (not including it because we're planning on hardening the property with 20k after purchase) is  $1,188.00. 

So, is it a good deal? 

Well, for me, I don't give a wooden nickle really about any of that. All I care about is WHAT IS MY NET PER UNIT. In this case, the net per unit, accounting for the extra 20k I'm putting in, works out to be $741 a month or 34% net to gross. 

Now you're saying, "Wow, what an awesome deal!" or maybe not? Remember, deals are contextual to the person looking at them. 

For me, I need $200 net per unit per month or it's not a deal. In this case, $741 is $60 shy of my threshold. So do I scuttle the deal? Heck no! We make an offer. 

Step Three, Making the Offer

So this is the fun part. Let's see if we can get our building and let's see if we can get it for a price that makes sense. Now luckily, on this deal, I only need to adjust the price slightly to get to my $200 a month net per unit, threshold. I need the price to drop by $10k in order to get at least $800 a month net. 

So what can we do? 

Well, remember, this building is in rough condition. It has a ton of things that need done and it's in distress. The seller wants it off their books. They're probably loosing money and they're sick of dealing with it. They're likely willing to negotiate with you. Don't be afraid to ask, this is where deals are made. 

Sure enough, the seller is willing to come down 10k just to get rid of the building. It's still a fair price considering the amount of work it needs. So everyone wins. 

Another thing you can use is the home inspection. ALWAYS GET A HOME INSPECTION. Especially if you're dealing in crap neighborhoods. I tell my inspectors to scare the shit out of me. 

Also, make sure the inspector gets on the roof and gives you a detailed look at it. If they can't get up there, then replace the inspector. Other options include getting a drone up there or hiring a roofer. Do not, do not do not, by without inspecting the roof. It's a third of the thing your about to spend tens or hundreds of thousands on. 

Finally, if they reject your offer, don't be afraid to walk away. If it doesn't make sense, then it doesn't make sense. I don't work for free and I'm CERTAINLY not going to field phone calls from tenants for free. 

In Conclusion

Much of what I do to find deals I do because I set benchmarks. If the property doesn't meet the required benchmarks, then it gets filtered. 

It all boils down to the cash flow though. Identify how much net cash flow you want to have each month, then work backwards. Figure out the gross rent, the expenses, the repairs and the mortgage. 

It's all elementary math, you just have to trust your numbers and not get stuck in the "What if" game! Don't let your chicken little get the best of you.