When do you go against rules of thumb?

Question

Hi Everyone,

Can you please share a time that a deal did not follow one of the rules of thumb (2%,50%) and was still a good one? I have taken the beginners course here on BP and read about these RoT and everyone says these are not necessarily the "end all be all" of whether a deal is good or not.

Thanks,

Bill Gulley · Answer

Learn real estate, not guru stuff or rules of thumb, the math is not that hard!!

After that beginners course, can you....

estimate by comparable properties the market value of a home?

can you present a pro-forma account of expected rents, income and expenses?

can you figure out what closing costs and holding costs will be?

can you find the fair market rent for a property?

Can you predict the repairs required, explain and recognize the property condition or are you taught just to be surprised?

I could go on, but you probably get the point, you just wasted your time.

Lenders don't use rules of thumb, neither do appraisers, insurance isn't taken by a rule of thumb nor is title insurance, values are not found by rules of thumb, and success in real estate isn't obtained by any rule of thumb.

Rules of thumb are short cuts for those who either can't or don't want to find valid solutions through analysis, never mind how easy that can be, it just sounds complicated......analysis!

Add, subtract, multiply and divide, that's basically it, if you understand the concept of the number line, you can consider timing, market movement, depreciation and a host of other aspects.

After you really understand your market, much of the computations can be done quickly, knowing material and labor costs you should be able to nail down costs of repairs and rehab expenses.

Understand the tax benefits available, cost of doing business, there is no rule of thumb that tells you what your ROI, cash on cash, vacancy, expenses or profits will be.

Someone with a sharper pencil will always do better than one who can't cut figures on a deal. You're limiting yourself to only those transactions that fall within a certain range, you're walking past the ones that don't seem to fit, that means you're limited to the deals you can do and profits are lost.

Learn real estate, your market, costing, a bit of accounting, a bit of valuation rules and financing rules, you'll not be wasting your time and you'll be a better operator/investor. :)

Joey Arrazolo · Answer

Thanks guys!

Jeff B. · Answer

to quote the movie "the rules are more like guide lines anyway".

Their value is at the boundaries; being too low or too high and you should pause to ponder "what did I leave out, misunderstand, or is this truly a bad deal" and that's the root of your question.

Another issue is to know when a rule is applicable; like the 1% rule is insane in California, so discard it and do the best you can.

Finding income is seldomly difficult, but the totla expenses come by asking "are there any others I've left out" after showing BP those you have considered.