Real Estate Investing Basics

Sorry, But “You Make Money When You Buy” Is a Lie

Expertise: Personal Finance, Personal Development, Real Estate Investing Basics, Landlording & Rental Properties
58 Articles Written
TRUE versus FALSE written on the white arrows, dilemmas concept.

"You make money when you buy real estate." This is the age-old saying that everyone knows to be true.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

There is a reason why it’s so popular and why everyone says it. It’s true. But it’s only true for 95 percent of real estate.

There is a small subsegment of real estate where the purchase price does not matter. If you know anything about me, you know that I am talking about house hacking.

I have taken a bunch of future house hackers out to look at houses in the Denver metro area and have talked to hundreds more. Almost every single one gets hung up about the purchase price at one point or another. They all try to shave off $10,000 to $20,000—whether it is by offering well below listing price or trying to nit-pick an inspection.

When flipping, wholesaling, or BRRRRing property, this $10,000 to $20,000 is huge. It is cutting directly into your profits. With buy and hold investing, and even more so with house hacking, your plan is to hold that puppy for the long haul. The $10K to $20K difference is going to translate to an extra $50 to $100 per month.

That may sound like a lot, but that is peanuts when it comes to what you’re missing out on by delaying the deal.

Why? Because when you house hack, it matters more that you get started rather than trying to find a home run of a deal. It is more important that you start saving $700 per month in rent, start adding hundreds of dollars of equity per month through appreciation and loan paydown, and most importantly, start that year timer so you can do it again in 365 days!

Don’t believe me? Let’s look at a deal I just went through with a client.

In this scenario, we will compare purchasing a property for $385,000 now versus finding a great deal and purchasing one for $370,000 six months from now. We will assume it takes six additional months to find the better deal than it would have just to pick the more expensive option now.

Scenario 1: Buy Immediately

Let's visit Connor. Connor is eager to start house hacking, and he does exactly as he should. He gets pre-approved by his lender, finds a reputable agent, and is ready to start looking at properties.

As he is looking, his agent explains to him what I just explained to you above: It is more important to get into a house hack than it is to get a slam dunk deal on purchase price. Even though this goes against the classic real estate investing mantra, “You make money when you buy,” he believes his agent. After all, the agent has done it before and has seen it multiple times over.

He finds a perfect single family home. It’s a large five-bedroom, three-bathroom for $385,000. Rather than trying to bleed every last dime out of the seller, he just wants to get the deal done and start saving on rent, building equity, paying down the loan, and most importantly, starting the one-year timer for him to purchase the next one.

two men wearing casual clothes sitting on a brown couch drinking coffee from mugs and talking

He offers the full price of $385,000 with $10,000 of earnest money down and a clause that states he won't make the seller fix anything that is under $1,000. This way, the seller knows that Connor is serious, and he is not going to nickel and dime them for a broken lightbulb.

For obvious reasons, the sellers are pleased with this offer; it is accepted. The inspection and appraisal come back clean, and Connor gets to the closing table one month from when he started looking.

Here are what the numbers look like:

  • Purchase Price: $385,000
  • Down Payment + Closing Costs: $20,000
  • Estimated Rent (Includes Rent Savings): $3,750
  • Mortgage Payment (PITI + PMI): $2,175
  • Reserves: $400
  • Total Cash Flow: $1,175
  • CASH-ON-CASH RETURN: 70.5%

Look at that!

Despite the fact that Connor offered full listing price, giving the sellers exactly what they asked for, he is still able to receive a cash-on-cash return of 70.5 percent. Sounds like a win-win to me!

Before we move on to the second scenario, let's look at the bigger picture: the net worth return on investment (NWROI). This takes into consideration all of the wealth-building factors of real estate, including cash flow, appreciation, and loan paydown, then divides it by the down payment plus closing costs.

Connor’s NWROI in Year 1:

  • Cash Flow: $14,100
  • Loan Paydown: $6,500
  • Appreciation: $0
  • Total Net Worth Gain: $20,600
  • Total Down Payment: $20,000
  • NWROI: 103%

Connor earns a NWROI of 103 percent with very little work, stress, and time wasted getting into the deal.

Next, let’s visit Zach. Then, we will compare the two over a 10-year period.

Related: 3 House Hacks in 3 Years & Now I’m Financially Free—Here’s Exactly How I Did It

Scenario 2: Find a Perfect Deal

Meet Zach. Zach is a bit more timid than Connor. He has heard the age-old advice, “You make money when you buy,” and he is going to fight tooth and nail for the best deal.

He starts the process off just like Connor: by finding a reputable agent and a lender. After six months of trying to find the “perfect” deal, he has finally found one.

It is exactly like Connor’s—a five-bed, three-bath for $385,000. However, Zach wants to be sure that he’s getting the best possible deal, so he low-balls an offer at $350,000. The sellers scoff at it, so Zach comes back with an offer of $360,000. They go under contract for $380,000.

During the inspection period, Zach is very nit-picky with all the inspector has called out. He demands $10,000 off the purchase price. After much back and forth, he gets his $10,000 off.

Now, Zach is purchasing the property for $370,000.

In order to compare apples to apples, we are assuming that everything is consistent in this example compared to Connor’s example, except for the purchase price and variables that change based on the purchase price.

Here are Zach’s numbers:

  • Purchase Price: $370,000
  • Down Payment + Closing Costs: $17,000
  • Estimated Rent (Includes Rent Savings): $3,750
  • Mortgage Payment (PITI + PMI): $2,100
  • Reserves: $400
  • Total Cash Flow: $1,250
  • CASH-ON-CASH RETURN: 88.2%

As you can see, Zach is rewarded for all of the extra work and time he put in by getting a cash-on-cash return of 88.2 percent, rather than Connor's 70.5 percent.

stockbroker-managing-money

How does this look from an NWROI perspective in Year 1?

  • Cash Flow: $15,000
  • Loan Paydown: $6,100
  •  Appreciation: $15,000
  • Total Net Worth Gain: $36,100
  • Total Down Payment: $17,000
  • NWROI: 212%

 Whoa! Look at that!

The numbers don’t lie, right? In both scenarios, from a cash-on-cash and an NWROI perspective, it is obvious that Zach is getting compensated very fairly for the extra time and effort he put in, right?

This is how most people think, and this is why you are on BiggerPockets reading this article—so you don’t end up selling yourself short by not seeing the forest through the trees. This comparison is missing one critical element. It’s an element that many new investors do not consider: opportunity cost and time.

Related: Should You Pay Off Student Loans or Invest in a House Hack?

Comparing Both Scenarios Over Time

The one incredibly important element missing in this example is the element of time. As a reminder, in Connor’s example, he purchases a property immediately. He doesn’t really care about getting the best deal. He just wants to get in.

Zach, on the other hand, is going to fight tooth and nail for every dollar he can save. Because of that, it is going to take six additional months to find the perfect deal for him.

Let’s compare Connor’s vs. Zach’s portfolio over the course of 10 years. Because it takes Zach an extra six months to find a property each time, over the course of a 10-year period, he is only able to buy five properties. Connor, on the other hand, is not picky. He is therefore able to purchase one property every year for those 10 years.

At the end of 10 years, Connor has 10 properties and Zach has five. For the sake of argument and ease of calculation, we are going to assume that each consecutive deal is exactly the same as the one before.

How does this look over a 10-year span? Check out this chart:

Whoa! Look at that difference.

Over the course of 10 years, Connor, who again did not get the best deal but instead just got in ASAP, has a net worth that is almost $1 million more than Zach, who got a “good deal” on each of his house hacks.

Conclusion

I think I have made my point pretty clear. While all of the advice tells you that “you make money when you buy,” this simply is not the case when house hacking. The power of house hacking does not come in buying it at a killer deal.

The power is being able to acquire cash-flowing properties for a low amount down every single year on the year. For every month you do not have that additional deal, you are losing out on thousands of dollars of net worth gain.

Happy house hacking!

Questions or comments about the above argument?

Let’s talk below in the comment section.

Craig Curelop, aka thefiguy, is the author of The House Hacking Strategy and a driven pursuer of financial independence. Sta...
Read more
    Christopher Smith Investor from brentwood, california
    Replied 9 months ago
    In reality it's never the case, just more meaningless sloganering. You make money at all points in the value chain, no matter what it is your doing. It may vary from business to business, and it certainly never hurts to get a great upfront price if that is relevant to your business, but you'll never get the best possible returns by falling back on the "wisdom" of a cliche.
    Scott Hibbert from Denver, CO
    Replied 9 months ago
    Hey @CraigCurelop can you break down your estimated rents and rent savings? I recently went under contract on a 4/3 house in Lakewood that I will be house hacking and I’m curious how you are estimating rents.
    Terry Lowe
    Replied 9 months ago
    $385 for 5/3 with no repairs is a screaming good deal in Denver!
    Dan Heuschele Investor from Poway, CA
    Replied 9 months ago
    Your numbers are not very detailed but the first property is barely a 1% property with a 95% LTV. Your cash flow projections are way too optimistic for such a property which inflates the value of time. I suspect with more conservative cash flow estimates the returns would be significantly closer to each other (I am not implying scenario 2 is the higher return but only that the difference would be significantly less than you depicted). I doubt Zack expected it would take 6 additional months to find the better deal. He likely hopes to find such a deal in the next week or two (and with only a $15k delta it is feasible). If he had found a $15k cheaper RE in a week or two, the savings would definitely warrant that extra time especially if the calculations used more conservative cash flow estimates. I do like the post. 1) it points out the cost of time 2) it makes people think.
    Jorge Duarte from San Luis, AZ
    Replied 9 months ago
    By waiting for that home run deal, the probability of falling into analysis paralysis are way higher versus just going in. Yes, you may lose money but what the article is saying is that the earlier you start investing the better the ROIs you will have in the end, with good and bad experiences backing your RE investing business. Thank you for the article @CraigCurelop!
    Rebecca Jackson Rental Property Investor from Dallas, TX
    Replied 9 months ago
    I think the title is misguided. Taking a classic concept and attempting to tear it down is incorrect; Everyone knows there’s many ways to do things in RE, and there are different strategies for different investment types.
    Ernest Johnson
    Replied 9 months ago
    If only this could work in California! I am curious how the numbers would differ on a $0 down VA loan? Any help is valued! @CraigCurelop
    A Schwartz
    Replied 9 months ago
    I do not understand the two examples. A Single family house, to be rented out, would have to be a duplex to do house hacking, live in one unit fr one year then rent both the following year. Otherwise you cannot rent out what you are living in unless you are taking in roommates..
    Stephon Mosby Williams Rental Property Investor from Philadelphia, PA
    Replied 9 months ago
    I love this article and it speaks to me on so many levels. I’ve been looking for my second triplex for roughly a year and even though I’ve made a handful of offers I believe I would have made more offers or made stronger offers if I wasn’t so focused on finding a good deal. I’m also a little more picky because I have to live in the property for at least a year, I have a 7 year old child and a full time job as well so I don’t want much of a project. 2020 will be a more realistic productive year for me. More investing + more involvement