Quote from @Rowan Klecker:
What kind of process do you go through when analyzing deals?
I've been practicing by analyzing 1 deal per day and I have a very general grasp on all the factors that must be taken into account and the process, but I wanted to know what everybody else does first and how they identify a good deal before they do a deeper dive. Moreover, I want to know what people look for when they do identify a good deal.
@Rowan Klecker
For me it’s mostly about cash flow - as real estate is my full time job & income. So your question translates to “how do I find / seek cash flowing properties.”
If I jump to the end of this story first, I will tell you that at 7% interest and high market values, very little cash flows well when you take into consideration principle, interest taxes, insurance, and a $100 maintenance reserve… at least where I live in Florida - but we have really high insurance rates. So you are often looking for a needle in a haystack to begin with.
But - when looking - you need to know what a “typical property will rent for - so let’s call that a 2/1 house that is around 800-1000sf. When you see something bigger, or smaller you just know you need to adjust for those factors… more bedrooms, more square footage will rent for a little more. So go to Zillow rentals and figure out what that rents for… in my area that’s around $1.15/sqft or around $1150/month.
From there it’s a math equation… $1150 minus principle, interest, taxes, insurance and $100 maintenance reserve equals my expected cash flow.
That same house sells for $145,000 in my area. If I’m putting 20% down, that’s $29,000 down and I’m financing $116,000. Let’s call the interest rate 7%. So Principle & interest will be $772. You can look up the taxes on your local property appraiser’s website. Let’s call it $1,500/year. You can call an insurance company for a real quote, but let’s say $1,000/year on insurance. So the taxes and insurance equal $208/month, and the maintenance reserve is $100. All those added together equal $1081/month… giving you a net cash flow (on a good month) of $69. That’s a crappy deal… and not worth pursuing. So you log that number in your head - that at $145,000 you have $69 cash flow when rates are at 7%.
But if rates were at 5%, your payment drops to $623 for the P&I instead of the $772. That’s $149 better - giving you $218/month cash flow. That’s average /descent in my area… not great… but perhaps worth pursuing. What if you could get an extra $100/month on your rental because it’s in a better part of town? Now you are at $318/month. That’s now pretty good for a financed property.
You will get good enough that you will be able to run these calculations in less than 2 minutes for a ballpark estimate on a house you are looking at. So it becomes a quick - back of the napkin exercise as you look at properties wherever you find them.
So the lessons here are that until rates come down, most houses for sale at current market rates will not cash flow (well) where they are worth buying in todays market. But rates are expected to drop in the coming few months as the Fed lets up on their interest rates. The fed meets 8 times a year. If they cut 1/4 point per meeting rates could come down by 2 points in a year. (Not that they actually set mortgage rates - but they influence them.)
You now know that as you look at 2/1 houses that anything priced near or above $145,000 isn’t worth pursuing in the short term… so you look for ones that are cheaper than that.
You can go to Redfin.com and put a search area in “list view” - versus map view and it will let you sort that area by all the table headers in the list - so you can sort them by $$/sqft for instance. This realistically gives you the cheapest houses in order in that area. Note that it doesn’t take house condition into consideration, so there is still other due diligence required - but this is a great way to look for the most affordable houses in a given area. You can then click into any of them to view them further.
So go and look for 2/1’s that are cheaper than the $145,000 one we already figured out won’t work well right now.
That’s one path to house hunting. For more adventurous ones - we have bought houses off of Craigslist, from foreclosure sales, from wholesalers , and even found a seller we were buying her house from had another one she was willing to sell us at the closing table! There are a lot of paths you can chase… but for market searches, the above is what I do.
All the best!
randy
