How do you find good investment deals???

[Jimmay]

I am looking to buy a real estate property and rent it out.  I have always heard the old real estate adage that you make your money when you buy the house not when you sell it. 

I was wondering without access to MLS, how can a normal small time investor compete with real estate brokers and bigger time investors?  And if anyone has any tricks of the trade they would recommend to finding deals? 

I bought my primary residence as a foreclosure after it was on the market for a few days, think I just got lucky.

Thanks!

[escolegrove]

We bought 2 investment houses in Charleston, SC because they made sense financially. We love the area, but currently live in Virginia Beach, Virginia. We had been looking around for the last 3 years in every city that we have lived in / visited. For me it was important that the numbers worked and appealed to the correct tenants. In the end, long distance was okay as long as the numbers worked. We found two great townhouses that functioned as condo's but are listed as townhouses.

I guess, my advice is look in every city that you visit. Know that you will spend hours looking and come up with nothing. When you find something be willing to jump on it. My husband is in the military. Therefore alot of the areas we have looked at has appealed to this demographic. What has been very important to me is the kind of tenants that would appeal to the house. I know we could have gotten cheaper "investments" but the tenants they would have attracted was not appealing. Therefore we have invested more money to get the level of tenant that would keep up the house/investment. We have also focused more on the cash flow and less on the appreciation ability. We have bought short-sales and foreclosures to get great deals.

[arebelspy]

http://www.realtor.com is a decent place to start (has most MLS listings).

Get a good real estate agent on your team.

Attend local REIA meetings.

There are lots of ways.

[arebelspy]

I have always heard the old real estate adage that you make your money when you buy the house not when you sell it. 

Mmmm.. Maybe.  It's certainly true for short term holds (like flips). It becomes less and less true the longer your holding period (and is mostly irrelevant after 10+ years). More important is the cash flow, and potential appreciation.

Now naturally, buying lower is better than higher all else being equal, but often all else isn't equal.  Naturally spending less (meaning less on financing, etc.) often is better cash flow, but that isn't always the case.

This blog post has an okay summary of the argument I'm trying to make (don't have a better one off hand):
http://www.signaturehouston.com/investing/why-equity-doesnt-matter-real-estate-investing-houston/

Basically don't go chasing a "deal" for equity's sake (say, buying below market) if you're doing a long term hold and the long term prospects on it are less than ideal (especially in terms of cash flow).

I wouldn't buy a property at 70 cents on the dollar unless it met my minimum cash flow requirements, unless I was planning on flipping it right away.

But the sound bite cliche "you make money when you buy, not sell" is about as true as "location, location, location" - can be crucial in some circumstances, but isn't the be all, end all, and critical thinking is more important than truisms.

[plantingourpennies]

@ARS seeing an article that says equity doesn't matter gives me the willies after seeing what happened in '06.

I wonder if my investment strategy isn't too conservative based on seeing others loose everything by buying with no margin of error.

Have to read that and think on it.

Best,
Mr. Pop

[arebelspy]

@ARS seeing an article that says equity doesn't matter gives me the willies after seeing what happened in '06.

I wonder if my investment strategy isn't too conservative based on seeing others loose everything by buying with no margin of error.

Have to read that and think on it.

Sure, and I agree, equity is nice and helps mitigate the risk of leverage, if you use it.  But in the long run, the author makes a good point that the longer your investing horizon, the less important your initial equity is (and by that I don't mean equity from the amount you put down, but equity gained by buying at 70 cents on the dollar, instead of fair market value) and the more important other factors are, like quality of property (which determines repairs, vacancy, appreciation, etc.)

It's a scary thought, and one that is tricky to apply and know when you're doing it right, but it is a good counter point to the "make money when you buy, not sell" mantra that some worship.

[lauren_knows]

I have always heard the old real estate adage that you make your money when you buy the house not when you sell it. 

I wouldn't buy a property at 70 cents on the dollar unless it met my minimum cash flow requirements, unless I was planning on flipping it right away.

What IS your minimum cashflow requirement? I've heard the rule "It should rent for 1% of the purchase price" tossed around, but I know that is pretty much impossible in my market.  For instance, my townhouse is valued ~$370k and would rent for $1900/mo, which is like 0.5%.

[arebelspy]

The rule of thumb for many investors is actually 2%, not 1%, but that's typically on multiplexes in the $500 rent range.  For SFRs it can be considerably lower, typically 1%-1.5%.

I might go as low as 1% if it was owner occupied (i.e. we were planning on living there) and we loved the house.  If it was below that (like in your market), I'd rent.

For my rentals, generally I don't even look at anything below 1.2%.  On a leveraged property, putting 25% down (75% LTV) with a loan at 5%, using the 50% rule (half of your gross rent goes to expenses, the other half services debt and is profit), 1.22% of your purchase price in monthly rent would give you 10% cash on cash return - plus the other benefits, like the principal gain from the mortgage being paid down, the tax benefits, and any potential appreciation, so you'll have a much higher total ROI, but at least 10% cash on cash is my standard on a leveraged property.

SFRs may even beat the 50% rule, so you might even get a better return than that (I have over the last few years), but that's my minimum in case the 50% rule does hold true for SFRs as well.

If it's not leveraged, a lower ROI might be okay, as there would be less risk.

That's on SFRs.  If I were buying a multiplex (say, a fourplex), I'd be looking for a higher ROI (probably 1.5% minimum, hopefully closer to 2%).

If my market isn't offering gross rents at least 1.22% of purchase price (or higher) on SFRs, I'd seek another market.

I also have dollar value minimum cash flow requirements, but there it is percentage-wise.

[KingCoin]

If you're looking to buy out of your local area (NYC is a no-go), what's the best way to narrow down the very large number of possible investment locations? While each area will have different risk/return characteristics, I assume some are investor hot spots.

[arebelspy]

Lots of real estate questions lately!  I'm glad others are getting into real estate investing, it's such a great opportunity to provide stable income for FIRE, plus high returns.  It's really quite silly.

Yes, there are investor "hot spots," but that doesn't mean you want to be there.  North Dakota has been a hot spot due to oil towns booming and prices doubling, tripling, crazy rent amounts, etc. Investors made a lot of money (and still are).  Still, not somewhere I'd want to be long term, and using that income for FIRE would worry me.

You'll probably want to start reading real estate forums, finding out where investors are, then start researching those areas.  Median prices, rent levels, vacancy levels, job and economic situation, etc.

It's not low work, like clicking "transfer" to send money from bank account to Vanguard, but there are great rewards.  You can make it low work (by investing with an expert, private money lending, hard money loans, etc. is one way to be involved in real estate without having to do much work), but then you won't get as outlandish returns.

You could probably get a solid 8% just lending your money with no work, but then you'd be giving up a few percent returns, not get the tax benefits, etc.  You could get 10-12% + points with a little more work (finding them and doing due diligence, basically) doing hard money loans, but then you have money idle a lot more.  Both those help avoid doing the landlord thing and are a good way to get involved out of state.  Otherwise if you're willing to put in the work then you can do the research, due diligence, and landlording, and get all the benefits (higher returns, tax benefits, and potential appreciation) along with the headaches.

I prefer the latter, but I know plenty of investors that hate that, but do all the former stuff and still make loads of money in real estate.  YMMV.

[lauren_knows]

I wouldn't mind eventually having 1 rental property as part of my portfolio in ER (either single or multiplex), but I don't see it as a primary savings vehicle for myself. 

My wife and I have lived in the aforementioned ~$370k townhouse for 5 years. We're in the process of refi-ing our $284k mortgage to 30yr-3.25%. At that point, mortgage+taxes+insurance will be $600-700 less than a potential renter would pay for the property.  We plan on potentially upgrading to a SFH (don't need more space, just would prefer an actual yard) in a few years, and it's always an option to keep the townhouse as a rental.  Hell, rents might get even better by the time we leave.

[arebelspy]

At that point, mortgage+taxes+insurance will be $600-700 less than a potential renter would pay for the property. 

Forcing cash flow through more equity doesn't turn it into a good deal, if it isn't already one.  If you calculate the ROI on a situation like that, it turns out to be very low.

[lauren_knows]

At that point, mortgage+taxes+insurance will be $600-700 less than a potential renter would pay for the property. 

Forcing cash flow through more equity doesn't turn it into a good deal, if it isn't already one.  If you calculate the ROI on a situation like that, it turns out to be very low.

Even though this isn't a remote possibility in the near future, what IS a good opportunity to consider renting a previously owner-occupied property? Still when the rent is 2% of the approximate value?  In all reality, we would want to sell the property when we move, but I've just considered all the options.

[arebelspy]

What you'd want to do is compare the opportunity cost of selling and investing the equity into something else.

Say you owe 200k on a 300k house.  Calculate what cash you'd net after all selling costs, commissions, taxes, etc.  Say it's 60k.  Compare putting that as a down payment into a new property in a good rental area, and calculate what your return will be versus keeping the original property.

Assuming you're moving from a mediocre rental market in terms of price to rent ratios to a good one, youll come out ahead most often with the second scenario.

The question becomes trickier when underwater (and shifts to trying to guess the future - when the market may rise, how much you're willing to lose in short term cash flow to not have to pay out of pocket now when you sell or hurt your credit with a short sale), but is a totally different question.  If you aren't underwater, it's a straitforward math question without needing to guess any future variables.

[chatsc]

Do people include condo fees and property taxes in the rent, for an investment property (in Ontario)?

Ie:  if i were to purchase a 2 bedroom 200$K condo, the property taxes in my area would be about 250$/month, and condo fees would be around 450$.   Say the mortgage was about 1000$/month.  I would have to charge 1700$/month just to break even.  That is about 350-400$/month higher than the average rental in my area. 

Am I missing something?

---For my rentals, generally I don't even look at anything below 1.2%.  On a leveraged property, putting 25% down (75% LTV) with a loan at 5%, using the 50% rule (half of your gross rent goes to expenses, the other half services debt and is profit), 1.22% of your purchase price in monthly rent would give you 10% cash on cash return - plus the other benefits, like the principal gain from the mortgage being paid down, the tax benefits, and any potential appreciation, so you'll have a much higher total ROI, but at least 10% cash on cash is my standard on a leveraged property---

what does the above mean?

[arebelspy]

Do people include condo fees and property taxes in the rent, for an investment property (in Ontario)?

Ie:  if i were to purchase a 2 bedroom 200$K condo, the property taxes in my area would be about 250$/month, and condo fees would be around 450$.   Say the mortgage was about 1000$/month.  I would have to charge 1700$/month just to break even.  That is about 350-400$/month higher than the average rental in my area. 

Am I missing something?

That will depend on your local rental market.  In most areas, owners (not tenants) pay HOA fees.  That can vary and be negotiated via the lease, however. 

Sounds like your area is not a good area to buy in.  I'd be renting there, and purchasing rentals elsewhere.

what does the above mean?

It means take your gross rent and divide it by .012.  That's the maximum I'd pay for a property (and rarely even that much).  That's the short version.  To understand it the long way will take more explanation, but that should get you started.

[Another Reader]

What you are "missing" is that it does not make sense to invest in that property type in your local market.  If you look at the recent sales, it's likely none of them were bought by knowledgeable investors.

[chatsc]

we were thinking of buying a condo for my parents to rent.  they (early 70s, deep in debt, sitting on a 500K$ house) sell their house when it gets to be too much, rent a condo from us, use the house sale $ to "live a little" (key word: little) and pay off their massive bills before heading to nursing home. 

but, if we wanted to break even, they would have to pay 500$/month more than market value for a rental.....

back to the drawing board, i guess....

[mizzoujohn]

Do people include condo fees and property taxes in the rent, for an investment property (in Ontario)?

Ie:  if i were to purchase a 2 bedroom 200$K condo, the property taxes in my area would be about 250$/month, and condo fees would be around 450$.   Say the mortgage was about 1000$/month.  I would have to charge 1700$/month just to break even.  That is about 350-400$/month higher than the average rental in my area. 

Am I missing something?

---For my rentals, generally I don't even look at anything below 1.2%.  On a leveraged property, putting 25% down (75% LTV) with a loan at 5%, using the 50% rule (half of your gross rent goes to expenses, the other half services debt and is profit), 1.22% of your purchase price in monthly rent would give you 10% cash on cash return - plus the other benefits, like the principal gain from the mortgage being paid down, the tax benefits, and any potential appreciation, so you'll have a much higher total ROI, but at least 10% cash on cash is my standard on a leveraged property---

what does the above mean?

Have you considered moving to Florida? Great real estate prices and, most important, it's not cold.
John

[chatsc]

Have you considered moving to Florida? Great real estate prices and, most important, it's not cold.
John
[/quote]

But what about skiing and skating and winter snowy camp fires and hot chocolate and and and and and.....

[Rural]

Arebelspy, can you recommend some good books or other  resources to get started learning? Where did the 50% estimate come from? What are the debates about what's a good ROI? That sort of thing. Oh, and how do you go about finding out what market rent levels are and what vacancy rates are?

See, I need a good point in the right direction, obviously.

[arebelspy]

Arebelspy, can you recommend some good books or other  resources to get started learning? Where did the 50% estimate come from? What are the debates about what's a good ROI? That sort of thing. Oh, and how do you go about finding out what market rent levels are and what vacancy rates are?

See, I need a good point in the right direction, obviously.

Yeah, if you do a search of these forums for real estate books, you'll see some threads where I recommended some.  BiggerPockets.com is a great online resource.

The 50% rule is a general role of thumb that over time expenses (vacancy, repairs, maintenance, management, etc.) will take approximately half of the gross income (it does not count debt service, that's separate).  Many investors have found this to be true, and there has been several studies showing the same.  Some will vary more or less (hope you don't get a property where it's closer to 60, or even 70%, but some places, especially much older ones in places with high property taxes, do t that), but I wouldn't ever expect it to be below 40%

Of course you can save on that by doing your own management, but shouldn't count that as part of the return of your investment, but rather a return on your labor.

The debates around what is a good ROI just involve the differences between what people expect in return for their investment, risk taken, work put in, etc.  Different places also have different CAP rates that will obviously affect ROI.

Market rents and vacancy rate have to be studied and researched on a localized level.

Hope that helps!  Check out some of the books (I always recommend someone start with Building Wealth One House At A Time, as you'll see in those threads) and let us know how it goes or if you have any other questions.

There are several experienced landlords and real estate investors on these forums, and a ton on BP, so just ask (here or there) if you need help.

[Rural]

I'll start with that book. Thanks! Will want to look at the studies on the 50% rule, too, though calculating locally will probably be our best bet. I've got plenty of time -- it'll take all summer to pay off our place here for starters (no debate about investing instead, please;as I've mentioned elsewhere we're paying 7.5% because we have a land loan, not a traditional mortgage, and I don't see any reasonable way to beat that rate investing.)

Editing to add I just put a hold on that book at the library.

[arebelspy]

(no debate about investing instead, please;as I've mentioned elsewhere we're paying 7.5% because we have a land loan, not a traditional mortgage, and I don't see any reasonable way to beat that rate investing.)

That's cause you haven't got into real estate investing yet.  ;)  But okay, I won't say anything since you seem to have decided on that.

[Rural]

Besides, I'm reading your dang book rec. :-)

[honobob]

   And if anyone has any tricks of the trade they would recommend to finding deals?

If you can't fill this out how would you know a deal if you found it?

http://www.mortgage-investments.com/resources/online-calculators/10-year-investment-in-real-estate/

I would say first thing you should do is decide what type of real estate investor you want to be and talk to people that do that type of investing.  Then learn everything you can about that type of property and the markets they are in. 

Other than "location, location, location" and "all real estate is local" all the so called rules of thumb don't apply to my investing.  I don't chase "deals",  have short term cash flow requirements and ignore price/rent ratios to trigger purchases.  And if someone is trying to show you a cap rate on a SFR they're actually showing you a crap rate. 

A good real estate agent can turn you on to some good properties but you need to be able to act quickly.

[Will]

what does the above mean?

It means take your gross rent and divide it by .012.  That's the maximum I'd pay for a property (and rarely even that much).  That's the short version.  To understand it the long way will take more explanation, but that should get you started.

Just so I am clear on this:  If I found a property that rents out for $1400/month, then I wouldn't want to pay more than about $116k?

[arebelspy]

what does the above mean?

It means take your gross rent and divide it by .012.  That's the maximum I'd pay for a property (and rarely even that much).  That's the short version.  To understand it the long way will take more explanation, but that should get you started.

Just so I am clear on this:  If I found a property that rents out for $1400/month, then I wouldn't want to pay more than about $116k?

I don't know what you would want to pay.  But yes, that's what I'm targeting in my acquisitions.  116k or less all in costs on a financed property at 5% or less for 1400 rent.  Hopefully better numbers on all those though.

[nktokyo]

I do this for a living and 100% you make your money when you buy. The system I use finds so many deals that 7/8 of what I buy I can onsell to investors for a profit, while still giving them a good deal. The profit I use to pay for the other 1/8.

My model is time-consuming, frustrating and blazingly effective. I buy most of my propertied through auctions, but this method isn't limited to auctions.

• Make sure every local real estate agent knows that you'll bid on anything that meets your criteria
• When they do send something actually bid, it will likely not be accepted but will ensure the realtor keeps bringing you deals - for them it's not a lot of effort and could lead to a sale
• Have a buffer in your buy price for repairs. Assume it's going to cost you $5,000+ (check if you can get access of course, assume the worst if you can't and it's a short sale) to renovate and factor that in.
• Have really strict criteria in place and whatever you do don't go past that price/return/whatever number - walk away because the deal of the year comes every week

Myself and the partner I work with are sent over 50 properties per week now and it takes a day to whittle the down to the 10 we want to go after. We might get one a fortnight. I do this professionally so I don't expect anyone else to buy two homes a month but the ratio of doing homework on 100 properties before you buy one I think is good because it guarantees you a better deal than the other 99 investors.

It's not the easiest piece of advice to take but if you're willing to review 100 deals and learn inside and out about your target market before you make a move you'll succeed. Otherwise you might succeed - there's a subtle difference.