{"id":120094,"date":"2019-12-13T14:30:11","date_gmt":"2019-12-13T21:30:11","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=120094"},"modified":"2024-01-15T14:04:00","modified_gmt":"2024-01-15T21:04:00","slug":"property-investment-risk-retail-prices","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/property-investment-risk-retail-prices","title":{"rendered":"Here&#8217;s How to Mitigate Your Risk When Buying Property at Retail Prices"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC1081924830&#038;light=false\" width=\"100%\"><\/iframe>  \n\n\n\n<p><span style=\"font-weight: 400;\">I\u2019ll admit that <a href=\"https:\/\/www.biggerpockets.com\/blog\/brrrr-strategy-real-estate-investing\" target=\"_blank\">BRRRR investing<\/a> is one of my favorite real estate investing strategies! <\/span><span style=\"font-weight: 400;\">It\u2019s BRRRR or bust, right? <\/span><span style=\"font-weight: 400;\">But what if this strategy of investing isn\u2019t for you? <\/span><\/p>\n<p><span style=\"font-weight: 400;\">Maybe you work long hours, travel often, or have a young family at home. Maybe you don\u2019t have the time (or desire) to search for below-market deals, negotiate <a href=\"https:\/\/www.biggerpockets.com\/blog\/hard-money-loan-ultimate-guide\" target=\"_blank\">hard money<\/a> or <a href=\"https:\/\/www.biggerpockets.com\/blog\/find-private-money-lenders\" target=\"_blank\">private money<\/a> loans, deal with contractors, and navigate the gauntlet of a refinance to get your money back out.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Does this mean you can never invest in real estate? <\/span><span style=\"font-weight: 400;\">Definitely not! <\/span><span style=\"font-weight: 400;\">There are still ways to purchase a rent-ready property now and build your wealth. It will, however, cost you more to do so. <\/span><span style=\"font-weight: 400;\">Oh, the dilemma!<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But, let me ask you this question: If you plan to hold the property forever, <\/span><i>does it really matter<\/i><span style=\"font-weight: 400;\"> if you choose to pay retail for a property from the MLS or a turnkey provider?<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Know Your Risks in Buying Retail-Priced Property<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">A few years ago, I started building my buy-and-hold portfolio with <a href=\"https:\/\/www.biggerpockets.com\/blog\/2015-12-15-turnkey-real-estate\" target=\"_blank\">turnkey<\/a> providers or paying near retail off the MLS. I was working full time, had a young family at home, was the guardian for two family members, and had an aging mother who needed care. I was burning the candle at each end (and a few times in the middle).&nbsp;&nbsp;<\/span><\/p>\n<p><span style=\"font-weight: 400;\">I knew real estate was a proven investing model that nearly anyone could repeat with success. And I was determined to get into real estate to build my family\u2019s wealth and financial independence.&nbsp;&nbsp;<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Fast forward a few years, I\u2019ve retooled my investment strategy to an almost all-BRRRR model. <\/span><span style=\"font-weight: 400;\">Let me tell you why. <\/span><span style=\"font-weight: 400;\">The advantage you get with BRRRR investing is massively <a href=\"https:\/\/www.biggerpockets.com\/blog\/8-ways-supercharge-retirement-real-estate-investing\" target=\"_blank\">supercharging<\/a> three of the <\/span><span style=\"font-weight: 400;\">four tenets of conservative investing<\/span><span style=\"font-weight: 400;\">:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><b>Capital preservation<\/b><span style=\"font-weight: 400;\"> by refinancing most, if not all, of your money back out.<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Cash flow<\/b><span style=\"font-weight: 400;\"> by pushing greater returns with most of your money out of a transaction.&nbsp;<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Appreciation<\/b><span style=\"font-weight: 400;\"> by capturing the forced equity of the property (rather than waiting for the market).<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Now, <\/span>I do not regret one bit getting into real estate paying retail prices.<\/p>\n<p><span style=\"font-weight: 400;\">However, you do need to be more diligent about your market and property in order to mitigate your risk. Because the largest difference in purchasing retail, is you are risking YOUR personal capital in the project rather than the forced equity in the property as you would in the BRRRR. <\/span><span style=\"font-weight: 400;\">However, you can still pull all of these levers of conservative investing <\/span><i><span style=\"font-weight: 400;\">even if<\/span><\/i><span style=\"font-weight: 400;\"> you purchase property retail.&nbsp;&nbsp;<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Let\u2019s explore!<\/span><\/p>\n<p><em><strong>Related<\/strong><\/em>: <em><a href=\"https:\/\/www.biggerpockets.com\/blog\/make-money-pay-retail\" target=\"_blank\">3 Reasons My First (Retail-Priced) Deal Has Become My Favorite<\/a><\/em><\/p>\n<h2><span style=\"font-weight: 400;\">How to Mitigate That Risk<\/span><\/h2>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-main-slider wp-image-120364\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/12\/neighborhood-street-1-702x336.jpg\" alt=\"know-your-market\" width=\"702\" height=\"336\" title=\"\"><\/p>\n<p><span style=\"font-weight: 400;\">Ask any seasoned investor how to mitigate risk when purchasing a property, and you will get a long checklist of the do&#8217;s and don&#8217;ts. However, at the core, there are three major ways to mitigate your downside when purchasing a property (especially when paying retail prices).<\/span><\/p>\n<h3>Capital Preservation<\/h3>\n<p><span style=\"font-weight: 400;\">You want to be in a market that supports your investment strategy.&nbsp;<\/span><b>The No. 1 way to stack the investing cards in your favor is to evaluate your market<\/b><span style=\"font-weight: 400;\"> and submarket for the following criteria:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Decreasing unemployment (more people have jobs to pay your rent)<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Increasing population (more people to rent to)<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Good job diversity (should one employer poof, your tenants have other jobs to secure)<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Good supply and demand (are rentals actually needed)<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Located in a <\/span><a href=\"https:\/\/www.biggerpockets.com\/blog\/defining-asset-classholistic-approach\" target=\"_blank\"><span style=\"font-weight: 400;\">B-class submarket<\/span><\/a><span style=\"font-weight: 400;\">&nbsp;<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">When you have more of your own capital invested in a deal, research how many ways you have to exit the property if needed, such as:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Hold long term<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Sell retail<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Sell to an investor<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Sell to your tenant with a lease option<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Convert into a <a href=\"https:\/\/www.biggerpockets.com\/blog\/2016-05-21-think-outside-the-box-ways-furnish-short-term-rentals\" target=\"_blank\">short-term rental<\/a> (vacation or corporate)<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">The more exit strategies you have available to you, the better you are able to preserve your capital as well.<\/span><\/p>\n<h3>Cash Flow<\/h3>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-96479\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2018\/02\/all-cash.jpg\" alt=\"cash-flow\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2018\/02\/all-cash.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2018\/02\/all-cash-300x144.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<p><span style=\"font-weight: 400;\">Cash flow is queen! Yet, I see many investors sacrifice cash flow for the future hope of appreciation\u2014a very risky proposition if you don\u2019t know what you are doing. <\/span><b>Cash flow will keep your portfolio stay afloat in a down market and give you choices.<\/b><span style=\"font-weight: 400;\"> When purchasing retail, ensure your income comfortably exceeds all expenses, such as:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Underwriting that rents are at least 125 percent of the expenses of the property (known as DSCR or debt service coverage ratio). When your DSCR is 1.25 or better, you will have a better chance to continue buying property with financing as well.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Securing long-term, fixed-rate debt on the property to lock in low expenses so you will not be forced to sell in a down market.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Accounting for all owner expenses such as HOA, utilities, insurance, and taxes (including possibly losing a homestead exemption).<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Setting aside proper reserves for a vacancy, maintenance, and capital expenditures. Most buy-and-hold investors go south in their analysis by <em>not<\/em> setting aside the proper reserves. You will have a vacancy. Water heaters will go out the day after closing. Tenants will wreck a dishwasher or a refrigerator. It\u2019s a matter of <em>if<\/em> not <em>when<\/em>. Also, if you plan to hold forever, you will need to replace mechanicals at some point during your hold period.&nbsp;&nbsp;<\/span><\/li>\n<\/ul>\n<p class=\"b-blog__title\"><em><strong>Related<\/strong>: <a href=\"https:\/\/www.biggerpockets.com\/blog\/reserves-protect-investments-finances\" target=\"_blank\">Protect Your Real Estate Investments &amp; Finances with Strategic Reserves<\/a><\/em><\/p>\n<h3>Appreciation<\/h3>\n<p><span style=\"font-weight: 400;\">When you are purchasing property retail, appreciation generally happens when the market gives it to you, and it is the icing on the cake. Know that any equity (your down payment plus market appreciation) locked up in the property is illiquid. You can only access the equity through a <a href=\"https:\/\/www.biggerpockets.com\/blog\/heloc-buy-real-estate\" target=\"_blank\">HELOC<\/a> or sale. So, evaluate your property\u2019s value periodically to see when harvesting equity makes sense in order to drive velocity with your money.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">A Case Study<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">My first out-of-state rental was in a solid B-class area of Indianapolis, Ind. I purchased the property for $120,000 and rented it for $1,250. After all expenses and reserves were set aside, I was clearing&nbsp; about $250 a month in cash flow. <\/span><span style=\"font-weight: 400;\">Was this $250 a month life-changing money for me? Not really, but I sure as heck wasn\u2019t complaining! My plan over time was to add 20-plus streams of income like this\u2014and continue to scale.&nbsp;&nbsp;<\/span><\/p>\n<p><span style=\"font-weight: 400;\">What I quickly realized was that the largest risk with purchasing property retail was my ability to weather the housing market.&nbsp; Should the market take even a 10 percent dip, I would lose about 50 percent of my capital in that Indianapolis deal!&nbsp;&nbsp;<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But&#8230;would I <\/span><i>really<\/i><span style=\"font-weight: 400;\"> lose that capital?<\/span><\/p>\n<p><span style=\"font-weight: 400;\">I would only lose that capital if I sold the property in that down market. This means that cash flow covered my expenses on the property. And because I had long-term, fixed-rate debt in place, I wouldn&#8217;t be forced to sell. <\/span><span style=\"font-weight: 400;\">This is not just blind luck.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In the case of this Indianapolis property, the value of the home actually increased to $148,000 in two short years. I cleared $23,000 after expenses on the sale, nearly doubling my initial investment of $24,000 with appreciation returns alone. (For grins, if I has BRRRR&#8217;d this project, maybe I would have cleared closer to $54,000 on a $0 downpayment).<\/span><\/p>\n<p><span style=\"font-weight: 400;\">You see, <\/span><b>I engineered luck <\/b><span style=\"font-weight: 400;\">by purchasing a <\/span><a href=\"https:\/\/www.biggerpockets.com\/blog\/defining-asset-classholistic-approach\" target=\"_blank\"><span style=\"font-weight: 400;\">B-class asset<\/span><\/a><span style=\"font-weight: 400;\"> in a solid rental market that cash flowed well. I also had a reasonable chance of appreciation, and most importantly, I could choose when I sold it.&nbsp;&nbsp;&nbsp;&nbsp;<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Conclusion<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Purchasing property retail is a viable option for investing in real estate especially if you don\u2019t have the desire or time to invest through a different model such as BRRRR. Remember, no one will care about your money as much as you do. Purchasing property retail means you have to be smarter at snagging a good deal in a great market.<\/span><\/p>\n<p><em>What has your experience been purchasing property retail?<\/em><\/p>\n<p><strong>Share with a comment below!&nbsp;<\/strong><\/p>","protected":false},"excerpt":{"rendered":"<p>In this post, I break down the three things you need to do if you want to invest in properties at retail prices. If you work full-time, have a family, or are already over-committed, this article is for you. Don&#8217;t let time constraints stop you from being able to build wealth.<\/p>\n","protected":false},"author":214306,"featured_media":120500,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7390],"tags":[],"class_list":["post-120094","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-acquiring-property"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/120094","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/214306"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=120094"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/120094\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/120500"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=120094"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=120094"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=120094"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}