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Podcast Hard Money Lenders Books Washington
BlogArrowReal Estate Investing BasicsArrowYour Belief That “You Make Your Money When You Buy” is Holding You Back From the Best Deals
Real Estate Investing Basics

Your Belief That “You Make Your Money When You Buy” is Holding You Back From the Best Deals

Jered Sturm
Expertise: Personal Finance, Personal Development
32 Articles Written

“You make your money when you buy.”

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“The blind man sees things clearest.”

“It’s darkest just before the dawn.”

All of these sound cool, but they are simply not correct in a literal sense. I would even argue they are misleading. The vast majority of the time when purchasing anything, including investment real estate, you do not make money at the time of purchase. Of course, we know the “you make money when you buy” phrase is a way of teaching us to buy right and get a great deal. When we purchase well, the future gains will likely be greater than if we purchase poorly—duh. I think we all know this is the underlying meaning of this phrase. The issue is that phrase and the mindset behind it has us as real estate investors too focused on purchasing the home run deals that are 30%, 40%, or 50% below market value. Because of this, we end up missing the opportunities where we actually can make money. Unlike the popular saying states, you can and do often make your money when you operate and sell. That is where opportunity is—and this is where we should put the equal if not greater focus.

Before I go further, I want to clarify that I am not saying that buying right or trying to get a property below market value is not important. It is, but too often we as investors focus on the price of our purchases to a fault, and as a result, we miss the true opportunities where the real money is made.

Where is the Money Really Made?

Typically as a real estate investor, if you make money, you will make it two ways: during operation (cash flow) and when you sell (capital gain).

Very often, the capital gains come from realized appreciation. The market, inflation, or other external forces have pushed the value of your property up, or maybe you forced appreciation by adding value one way or another. Market appreciation is speculative and often comes with a bit of luck. Forced appreciation can be controlled, predicted, and executed. Investors can do this through the operations of the investment.

Related: How to Beat the Coming Housing Slowdown With a Value-Add Multifamily

That’s right: The biggest factor determining if you make money is not how you buy but how you operate. Operating well will boost your cash flow as you hold investments and force appreciation to be captured on the sale of the property.

Stepping Over Dollars in Search of a Penny

We've all heard another popular saying in business: "Stepping over dollars to pick up pennies." When we focus so hard on buying a property with X cap rate or X% below ARV that we're blind to the opportunities that may exist in the operations of the investment. When we do this, we step over dollars in search of a dollar—or worse, we step over dollars in search of a penny.

Good Operations > Good Purchase Price

 A good operator can take a mediocre or even bad investment and turn it into a great investment. On the flip side, even the best investment can crash and burn with the wrong operator behind the wheel. The obvious goal, then, is to strive to purchase a great investment AND operate it well. I agree, but the argument of this article is that the first step, the purchase, along with the desire to always get a great deal, is blinding investors to the opportunity that lies within the operations.

This is applicable whether you’re buying single families, multifamilies, or any other type of investment. Brian Burke, a seasoned and successful multifamily investor whom I look up to, has said in many interviews, “I don’t care much about the cap rate. Cap rate really only matters when you are selling.” Brian knows the money is made in the operations and the opportunity that exists within them. So very often we hear people say, “I would never buy below an 8 cap,” or whatever their target may be. Like Mr. Burke and myself say, why does it matter? Good investors who can see an opportunity will gladly pay a 3, 4, 5, or whatever cap on actual financials if there is an opportunity within the operations large enough to make the investment advantageous.

The same goes for flipping houses. Operations are more important than the purchase. Good flippers maximize their profits by operating efficiently. They keep holding costs low, they ensure renovation budgets do not go over, and most importantly, they see an opportunity that others leave on the table. If a property has room to add a bedroom or bathroom to the floor plan, they realize and execute on that opportunity to increase the property’s value.

They Pay More Because They See or Create Opportunity You Don’t

Most markets are competitive right now, and quality investments are harder to come by. There are undoubtedly some poor investments being made. But there are also many skilled investors able to pay more because they can capture opportunity that is found in the operations of the investment.

Related: 5 Sticky Real Estate Situations That Offer Investment Opportunities

Price is part of the puzzle and undoubtedly an important one, but so often real estate investors focus on price to a fault. This prevents them from capturing the real money to be made. By shifting your focus first to the operations of the property, you’ll be able to maximize returns, allowing you to pay the amount needed to get the transaction done while maintaining a satisfactory level of risk.

I wrote this article because I am guilty of this very mistake in thinking. The past two years have been slower than desired on acquisitions. I write this article to self-reflect as well as help others. I know our company has major competitive advantages when it comes to the operations of an investment, and by focusing on the operations more than the price first, I will uncover opportunities that sellers, owners, and competitors will miss. I hope you will do the same.

We’re republishing this article to help out our newer readers.

Do you agree with this assessment? Disagree?

Leave your comments below!

By Jered Sturm
Jered Sturm is the co-founder of SNS Capital Group LLC. Starting in the industry 15 years ago as a maintenance technician for residential rental properties, Jered built on that experience to start ...
Read more
Jered Sturm is the co-founder of SNS Capital Group LLC. Starting in the industry 15 years ago as a maintenance technician for residential rental properties, Jered built on that experience to start a construction company that over a decade ago led him to begin purchasing investment property. Since his humble beginnings in the industry, Jered has quickly scaled his investments and now focuses on purchasing large apartment communities in the Cincinnati, Ohio market. While Jered's company has grown to own and manage over $30M in assets, they still focus on the core competency of buying, renovating, and maintaining investment rental property. Jered has been a featured guest on the BiggerPockets Podcast twice and has been contributing to the BiggerPockets blog since 2015. He looks forward to continuing to help others gain financial independence by sharing his experiences.
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37 Replies
    Paul Moore Investor from Lynchburg, VA
    Replied about 3 years ago
    Thanks Jered. Great information as always. My firm was recently about to walk away from a deal because of a low “going-in” cap rate. But that was based on the last year’s financials, which were based in part on several operational inefficiencies that can be quickly corrected. We took a second look and realized that this deal made a lot of sense, and that we will be able to operate it profitably. I do, however, agree with the comment that we need to focus on cash flow and make sure that works even in a no-appreciation world. It’s happened before, and most all of us remember it. It could happen again.

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    James Register Professional from Goldsboro, North Carolina
    Replied about 3 years ago
    Great Post, No Great! Post, I completely agreed with you!!

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    Nathan Brooks Real Estate Investor from Kansas City, KS
    Replied over 2 years ago
    I enjoyed reading this and the self reflection. I think the issue arises when there isn’t a clear red light / green light line. I say YES to these days (= rate of return, cap rate, values, etc). If we don’t have these metrics in our buying criteria it’s very difficult to understand (or train on) what we will buy. For my team, we will buy 150-160 houses this year … and scaling to that level has required us to adjust some of our metrics. BUT, we have been clear on them. Discussed them with my partner and I. Checked them as we bought them, and reviewed them as we sold them or help them. Know your numbers and make decisions based on facts and data … and be prepared to say YES when its a yes, and NO … when its a no.

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    David Seematter Investor from Chandler, Arizona
    Replied over 2 years ago
    Great post and a lot of great discussion. I have been pondering this idea myself over the past 12 months. I see deals go for more than my maximum and wonder what the buyer is thinking or evaluating. It is true that at today’s rates (both rents and interest), I could be buying higher and still cash flow well. You add a few interest rate points to financing or rent stagnation, the could turn quickly. Definitely thought provoking. Thanks for sharing.

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    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied over 2 years ago
    I definitely agree that the quality of your operations are hugely important and overlooked. Great rehab/management can make up for a mediocre deal, but it’s not ideal. I still like the phrase “you make your money when you buy” but I think it needs the accompanying phrase that “you won’t realize that money without good operations.”

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    Account Closed from Orlando, Florida
    Replied over 2 years ago
    Totally agree but you have to balance between the two criterias. Good ? post though.

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    Eric Carr Real Estate Broker from Los Angeles, CA
    Replied almost 2 years ago
    For me, making money when I buy I buying right, but also with a look at the long term. I do not focus on discounts or getting something under market. That’s a myopic strategy and doesn’t mean a thing

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