Real Estate Investors: Does Your Business Model Depend on Finding Needles in Haystacks?
In the world of real estate investing, it never ceases to amaze me how much banter I hear about “finding a good deal,” including the question I hear most often: “Where are all the deals?”
Part of what’s going on here is understandable in that newer investors looking for their first deal are stuck in the “analysis paralysis” stage. They’re worried they don’t know enough to avoid making a big mistake, so they try to lessen their worry by reading more articles, listening to more podcasts, asking more questions in forums, looking at more properties—and meanwhile, more decisive investors are out there buying properties. My advice? Of course you should educate yourself, but there also comes a point when you need to get your hands dirty without risking the whole farm. Real estate investing is a learn-by-doing business.
But it’s not just the nervous first-timers who are stalled out. One of the biggest differences I see between an investor doing lots of deals and one who’s not doing deals is what I’m alluding to in the title. In other words, be careful about focusing too narrowly on finding the next “perfect” deal because, frankly, there aren’t many perfect deals that fall into our laps.
Related: 5 Deal-Finding Tricks I Use to Buy Around 100 Properties Per Year
(If you really believe you can’t find any good deals, check out the article I wrote recently about creating a deal by focusing on the financing side of the equation, “No Inventory? Deals Can Be Made in Any Market. Here’s How.”)
Today, though, I’d like to touch on the various extremes that people go to in hopes of finding this mythical perfect deal.
Making Money on the Buy
This is a great concept, and it is true that real estate investors make most of their money on the buy, especially wholesalers and retailers. What they forget to tell you is that it isn’t the only way to make money. After all, they’re usually only referring to short-term real estate investing, as opposed to a buy-and-hold approach.
When investing in a piece of real estate long-term, I think it’s much more important to invest intentionally and with purposeful plan in mind. In other words, before entering into an investment (i.e. buying an investment property or even buying a property you intend to occupy), the investor should have his/her exits and goals in mind.
This may shock some people, but I bought my first owner-occupied duplex 27 years ago at full retail price. And guess what? I still own it, and I’ve made plenty of money from it over the years. I even did several refinances, and I still cash flow $800 a month. (The price was $68,000 when I purchased the property, and it’s now worth in the $175,000-$200,000 range.) My point is that the place cash-flowed the whole time, and after the first cash-out refinance, my return on investment was off the charts.
Here’s the main point I’m making: In this deal, my focus wasn’t solely on finding a great deal at the lowest possible price, or in other words, searching for a needle in a haystack. Instead, I did this far-from-perfect deal (from a short-term, purchase-price-focused perspective) because I knew that long-term it was a winner.
So, besides purchase price, what else do I think real estate investors should look at, especially when analyzing the profitability of a deal?
Personally, how long it will take to double my money or to get all of my investment dollars back is the biggest consideration.
The “Rule of Seventy Two” is a formula that helps to determine the number of years to double your investment dollars. Simply take 72 divided by the interest percentage on a loan or simply your rate of return. For example, if your net return on a rental property averages 8%, it will take you nine years to double your money.
That said, what you estimate as the profitability from your deal and what you will actually make on the deal are two separate things. Until you sell your investment and completely exit the deal, you don’t know how much you’ve really made.
This uncertainty is one of the reasons I don’t own all my real estate in one town, as this allows me to limit my exposure in any particular local market. In fact, my properties are in nine different areas throughout the county.
It’s the same when investing in mortgage notes. I may know what I’m supposed to make on the note by looking at the payment, interest rate, and term, but what I can’t predict is the real outcome.
If the borrower sells their home, refinances, or just plain wants to pay me off early, there’s nothing I can do about it, except maybe do the happy dance because a discounted note that’s paid off early usually has a higher yield.
Looking for Deals in All the Wrong Places?
Now, before you go out looking for perfect deals, you need to know what a good deal looks like.
The answer is probably different for you than it is for me, as we all have varying levels of risk tolerance and experience. If I’m happy with the risk, the collateral, and the yield, then the next step for me would be to pull the trigger.
Once you know what you’re after, if you get in the game and network with others in the space, you’ll quickly learn all the latest strategies to get better deals. Some folks use all kinds of crazy marketing strategies, some of which I’m sure work great sometimes.
Personally, I’ve never really had trouble finding deals once I knew what I was looking for. Most of my deals came right out of the good ol’ MLS.
What Would I Do Differently?
Looking back, my biggest regret wasn’t buying the “wrong” deal. It was not buying more of the right deals. As an investor-Realtor at RE/MAX, I was selling about 75 properties a year to investors in a good market. My mistake was not using more leverage (private and hard money) to buy them all myself. I just wasn’t thinking big enough.
So, let me ask my BiggerPockets friends: Are you going down some rabbit hole looking for that needle in a haystack, or are you setting goals, planning, and truly building a portfolio of imperfect but good deals?
Another great post from BiggerPockets.com.
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