Finding & Evaluating Great Deals

Fundamental Principle

You can find listings everywhere you look, but finding deals and avoiding dogs requires consistency, diligence, and thoughtful analysis.

Our Story

Starting with Turnkey

As with many real estate investors, we acquired our first listing through a Turnkey provider. We had just moved into our Southern California House Hack (not to mention, just had tied the knot), and wanted to continue building and diversifying our investment portfolio.

Nick had been listening to podcasts like BiggerPockets and Get Rich Education (Diane was slowly becoming a convert), and chose to focus on the Indianapolis market to launch our business. We worked with a local Turnkey provider who spent time understanding our needs (or so we thought), and eventually identified a listing in our budget.

Our Southern California House Hack:

This was our first investment acquisition, and so we were able to secure traditional financing on the property with relative ease. We acquired the property for $63,000 and the Turnkey provider (also acting as the property manager) guaranteed us a monthly rent of $650.

In evaluating the deal, we started by ensuring the property met the 1% rule of thumb (generally speaking, if a property has rent that is equal to 1% of the value of the home each month, you’ll break even or cash flow). We then worked backwards to validate that math, factoring in expenses like property management, capital expenditures, repairs, vacancy, insurance, taxes, mortgage, etc.

Since the numbers lined up (without a ton of cushion, as should be expected when you’re working with a Turnkey provider), we chose to move forward. Several months, a stabbing, and $6,000 in turn costs later - that cushion was pretty much eradicated for year one. Once we secured a more reputable PM, it did become a cash-flowing property, though the big win on this deal was transitioning from aspirational to actual real estate investors.

Moving On Up

As we started to gain traction in building our portfolio, Nick committed himself to identifying and evaluating one deal every day for ninety days straight (and we acquired three new properties in this time). The main source he used was online MLS aggregators (Zillow, Trulia, Xome), though as we begin to gain a reputation for closing, agents and other investors started to send deals our way.

One of the deals Nick identified and evaluated was an REO property in Indianapolis listed well under market. After quickly auditing with the 1% rule, Nick spent the time to dive deep into the numbers, estimating repairs from the listing photos. Conferring with our agent, we submitted a $70,000 cash offer (pulling from our HELOC on our Southern California home) - and after some negotiation - landed at a purchase price of $74,000. As estimated, rehab costs were minimal (about $2,000), and we were able to appraise at 92,000 when we refinanced the property. We pulled about $62,000 out of the deal when we refinanced - leaving just over $14,000 invested in the deal .

Finding Deals at All Levels

As you’ll notice, the strategies we use to identify great deals have evolved over time. As we’ve become more confident in our knowledge of the Indianapolis market, we’ve been willing to make educated bets with greater upside. That said, we’d advise different strategies based on your knowledge, as well as the time you have to invest in the process.

Stars indicate level of effort and investor sophistication required.

Beginner & Low-Effort Strategies

For new investors, or those looking for a truly “passive” experience, Turnkey aggregators can be a great place to start. Inherently, you should expect this to be your lowest ROI option - but it’s a great way to mitigate risk while you learn. It’s also a great strategy for those who have more cash than time to invest in building their portfolio.

As you begin to build relationships in a local market, you can also work with agents to source deals. Expect to invest some time here, both in building your credibility with an agent, and in explaining the types of deals that most interest you. Agents open to working with investors tend to be earlier-career (as, let’s be honest, we’re higher-maintenance customers), so make sure your agent has a managing broker who will be hands on as new and novel situations arise.

Intermediate Strategies

As you build confidence, you can begin to leverage MLS aggregators (Zillow, Realtor.com, etc.) to identify potential deals. This is how Nick built a strong muscle in real estate analysis, using his one-deal-a-day practice.

As you’re growing your portfolio, hopefully you’re doing the same with your network. This might include fellow investors, agents, and property managers who have a sense of your business. As you develop a reputation in your local market, you’ll start to see off-market listings hit your desk - and this is where some of our very best opportunities have come from!

Advanced & High-Touch Strategies

We can’t say this enough: until you are 100% confident in your abilities as a real estate investor in a particular market - it’s important to have a fiduciary (agent) watching your back. That said, wholesalers can be a great source of under-market deals as you become a more advanced investor. Not all deals coming from this audience will be worth pursuing - but do the math, and you’ll certainly find some gems.

On the flip-side, you can also begin to self-source your own deals through door-knocking and yellow letters. This is the most time-intensive strategy, but arguably also offers the biggest upside.

Breaking Down Deals

The 1% Rule of Thumb

Monthly Rent > 1% purchase price

The 1% rule of thumb is just that - a broadly accurate guide that helps you decide if a deal is worth investigating further. If a property gets close to (or exceeds) the 1% rule - you know it’s time to dive deeper into the numbers.

Building Your Estimates

Once you’ve decided a property passes the 1% rule, and you want to dive deeper, you’ll want to leverage a tool like those offered by BiggerPockets (in time, you might build your own - as we have). The data you plug into your calculator should be informed estimates. You can use sites like Rentometer or Zillow, or work with your PM, to understand what the property may rent for. Then, you’ll need to determine your all-in investment (including things like the rehab, loan costs, property management, vacancy, etc.).

If you’re new to estimating rehab costs, we highly recommend using the BiggerPockets book on estimating rehab costs (we promise, they’re not paying us). If your agent has seen the house, he/she can also give you a solid understanding of the big ticket costs, and line items on what needs to be repaired so you can do your own research. Otherwise, you may be working off listing photos to build your estimates.

In some cases, if you’ve built a strong relationship with a contractor, you can ask that he/she walk it for you. No one does this out of the gate, so be reasonable with your expectations if you’ve just started working with a local contractor. It’s also key that you’re relatively sure you’re purchasing the property. In our case, we usually don’t ask this of our contractor until we’re under contract.

And now - for the ten most important words in this post:

Estimate higher than expected costs, and lower than expected rents.

Why? Every person involved in the transaction (including you) is incentivized by you closing, rather than walking away from the deal. The advice you get, and your own internal monologue, likely tilt optimistic.

Knowing this, you can begin to develop your ideal closing price. As you begin negotiations, you want to likely start below that price - giving yourself room to come up.

Mistakes We’ve Seen (and Made)

As once new investors, and now as advisors, we’ve seen some patterns in how deals start off on the wrong foot.

Overly Aggressive Estimates

It’s dangerous to expect that your listing will lead the market in rents (although it might). When estimating monthly rents, be conservative - and remember to account for things like vacancy and PM lease up fees.

If you’re flipping or BRRRing, be cautious when estimating your ARV. Markets can change quickly (especially on a longer rehab) and you’ll want to build in some cushion to ensure the property appraises.

Underestimating Costs

We’ve never been disappointed that we overestimated our costs. In fact, conservative as we are - we’re still often surprised by expenses we couldn’t anticipate - and grateful that we’ve built that cushion into our numbers. Theft, vandalism, crime - we’ve seen it all in our homes (yes, in A and B class) - and that’s on top of more mundane issues like harsh winters and aggressive city ordinances.

It’s key that you build the unexpected into your costs - because they’ll happen. If you find yourself reducing your cost estimates to make the deal work - take a pause.

Forgetting Line Items

It’s worth reviewing your current books to catch any line items you might have missed, like utilities (if you’ll be paying them) or underestimated, like one-off PM fees.

Underestimating Timelines

Rehabs take longer and cost more than you think, and your holding costs can pile up if you haven’t accounted for them. Again, planning won’t keep things from going wrong - but it will keep you afloat when they inevitably do!

Stopping at the 1% Rule (of Thumb)

1% deals are often in lower-end neighborhoods, and you’ll find yourself struggling more with issues like expensive turns, evictions, vacancies, etc. Lower end properties are also often made with less durable materials, so you might be surprised by your capital expenditures.

Some of our best deals no longer meet the 1% rule, as they’ve appreciated faster than rents have risen - but we have great residents in place and a great ROI. In particular, we recommend using other metrics (and ignoring the 1% rule) in high-end neighborhoods and short-term rentals.

Giving Great BRRRs a Cold Shoulder (no, we’re not sorry for that terrible pun)

Many investors assume that a great BRRR means getting all of your cash back out - but that’s hardly the case. In BRRR deals, you’re successful because you add more value than you spend. In one of our deals, we added over $20,000 to our net worth, and only locked up $14,000 in the deal. We over call 100%+ year one return a win (and you should too).

Not Leveraging Your Network

When only you (or people who stand to profit) look at a deal - you’re more likely to miss things. Leverage investor groups and forums as you build your network, and get a second pair of eyes on the deal.

Leveraging the Wrong Network

When you listen to the doubters (especially those who have never done a deal) - analysis paralysis can take over. Let us save you some worrying this is not the best deal out there, and you could do better with your money. But if you wait for the perfect deal, you’ll miss a lot along the way (and probably lack the partners, cash, and knowledge to do that perfect deal when it comes along).

Keyboard warriors talk a big game - but make sure you’re building your network with investors who are out in the trenches, doing the work. When the numbers line up - do the deal, learn something, and do the next one.

And if you need some advice, or a second pair of eyes on that deal … you know where to find us.