Millionaire RE Investor - Discount you Require

22 Replies

After reading the Millionaire Real Estate Investor by Gary Keller, the one concept which I had not previously considered is "the discount you require" as one of the key factors in your buying criteria.   

I would appreciate other opinions on this concept of how to come up with a viable strategy applying the discount rate you require when making offers.  I'm not sure how realistic it is to say you expect a 20% discount.  However, in my mind, if you could achieve a 20% discount on every buy, it would almost be guaranteed success.  

My current approach to buying multi-families is that I run my numbers and once I am satisfied with the ROI/cash on cash metrics and that becomes my purchase price target. Should I be taking that calculation and reducing it by a discount rate??

I don't require any discount.  The numbers on multi family speak for themselves.  I look at how much it will be worth when the project is completed.

In all reality, I have probably overpaid on some.  That does not matter though.  Some of the largest returns have been on zero cap purchases.

That is fundamental to my business model.  

I am looking for 25-30% discount on market value even for my rentals. This gives you way more options, rapidly increases your networth.  

That being said, I buy a lot of problem properties to achieve this discount.  So I have to put in some upfront work to stabilize the value.

Originally posted by @Steve L. :

That is fundamental to my business model.  

I am looking for 25-30% discount on market value even for my rentals. This gives you way more options, rapidly increases your networth.  

That being said, I buy a lot of problem properties to achieve this discount.  So I have to put in some upfront work to stabilize the value.

==================================================

It seems logical that this approach would work, however, is it difficult to find sellers willing to sell at such a deep discount?  Also, out of the properties you make offers on, what is your typical rejection rate?  Do you have to put in offers daily knowing you will have so many rejections just to meet this criteria? 

I'm amazed how this book glossed over this topic of  the "discount your require".  I would argue that its the most important concept to long term success!

@Lee G.

If you are going to put in lots of lowball offers, you are going to get rejected most of the time.  

I'm not exactly sure what the "Discount you require" actually refers to, but it makes sense for most investing goals.  If you are flipping houses, you probably aren't going to find deep discounts on easy to comp houses.  If 14 4/2 ranch style houses have sold in the last 6 months for $140-$150k, your chances of getting one for $115 is pretty low unless there is something wrong with it.  But paying 149k for it is fine if you can rent it for $2000/month and make your numbers.  If you "insist" on a 20% discount, the deal is going to pass you buy.

Look up 70% ARV here on BP. That search will yield tons of math for the reasons you need to buy flips at ~70% of ARV max.

It is tough to find those deals and that is why not everyone is a real estate investor. I look for at least 20 percent below market. Sometimes that is 20% below ask, sometimes that is 20% above ask. I am not making 100's of lowball offers. Some houses need work or are priced for a quick sale. The discount is not off list price, but off market value. 

How many perfectly workable deals is it worth passing up, in order to get your "required discount?"

Originally posted by @Richard C. :

How many perfectly workable deals is it worth passing up, in order to get your "required discount?"

My counter argument would be that many people have limited capital to invest with so if they decide to deploy capital, they want to ensure that it will be as much of a "homerun" as possible.  If you can afford to buy one investment property a year, then this may not matter as much.   Just a thought.   I am still in the earlier stages of my investment career.

Especially when you are new to the game, swinging for the fences leads to lots of strike-outs.

Originally posted by @Lee G. :
Originally posted by @Richard C.:

How many perfectly workable deals is it worth passing up, in order to get your "required discount?"

My counter argument would be that many people have limited capital to invest with so if they decide to deploy capital...

This is why I recommend people have a pair of hard numbers for ROI and Cashflow. The amount of capital you have limits the deals you can do. I don't bother looking at deals that don't meet my 15% ROI (Cash on Cash) and $125/month/door.

If I have 40k in investable cash, I can't buy the 50k deal without outside help.  I might "swing for the fences" by putting in an offer that allows me to only invest 40k, but I wouldn't put any hope in it.  Once in a great while you do get one.

My point is that if you can do a deal that meets your numbers, do it.  If you can do 3, do all three.  Don't pass a deal up because of a need to "beat the market" or something like that.  If the market it up you'll look like a true genius in 4 years when you sell them all for big profits.

Originally posted by @Aaron Montague :
Originally posted by @Lee G.:
Originally posted by @Richard C.:

How many perfectly workable deals is it worth passing up, in order to get your "required discount?"

My counter argument would be that many people have limited capital to invest with so if they decide to deploy capital...

This is why I recommend people have a pair of hard numbers for ROI and Cashflow. The amount of capital you have limits the deals you can do. I don't bother looking at deals that don't meet my 15% ROI (Cash on Cash) and $125/month/door.

If I have 40k in investable cash, I can't buy the 50k deal without outside help.  I might "swing for the fences" by putting in an offer that allows me to only invest 40k, but I wouldn't put any hope in it.  Once in a great while you do get one.

My point is that if you can do a deal that meets your numbers, do it.  If you can do 3, do all three.  Don't pass a deal up because of a need to "beat the market" or something like that.  If the market it up you'll look like a true genius in 4 years when you sell them all for big profits.

---------------------------------------------------- 

I agree with you on the cash on cash of 15% which how I assess multi-families.... So why do you think that Kellar included it in his book?  His book was supposed to be based on research of how successful investors "bought it right".

Originally posted by @Lee G. :
..stuff...

---------------------------------------------------- 

I agree with you on the cash on cash of 15% which how I assess multi-families.... So why do you think that Kellar included it in his book?  His book was supposed to be based on research of how successful investors "bought it right".

Marketing, I think he included it because it is a catchy phrase.  Almost every good deal in RE has to do with getting the property for a price that allows you to make money.  Price is also the easiest part of your research to conduct:

X dollars for Y years at Z rate is ALWAYS A dollars out the door each month for a mortgage.  Just about everything else is a highly educated guess.

I applaud Kellar for being able to sell his book.  I have no clue if he made millions in RE before writing it.  The research he did could all be conducted here on BP.  Talk to folks about 200 deals and run some basic stats on them.  I bet the primary factor (.8+ correlation) in getting a "good" deal or better would be price paid.

Much of the literature in the RE world seems to be the same advice rehashed over and over again.  If it is entertaining, all the better.  The same principles have applied to business since it was invented, so they still apply to real estate.

I agree whole heartedly about these real estate books!  

The notion of a discount is very viable. The rick is to know - discount against what???

This is where most people trip up :)

Originally posted by @Richard C. :

Especially when you are new to the game, swinging for the fences leads to lots of strike-outs.

 And bunting toward first with no one on base gets you removed from the game.

I think it is wise to look for extremely good deals when your resources is your biggest limitation.

But that said don't stay out of the market for long or the so so deal may look like a bargain 1 year from now while you're still on the sidelines.

@Lee G.

  this is very much a regional question... unless your doing value add there is almost zero chance your going to buy a property in one of the hot markets for 20% under market because someone does not know the true value of the asset.

Also if you stick to these metrics you may just never get in the game... Look at @Ben Leybovich   he is very much firm on what he does at least he post that.. and its been 2 years or so since he bought a deal ( at least that's what he wrote) I think lately he has one in his sites... So you have opportunity cost...

But if you use the Nation as a whole you will be able to find 20% off deals.. just need to find those under served areas and markets that are not over heated.

For those reasons I invest in 12 different states...  find the hot spot and engage.. so over the last 2 years while Ben is looking for that pearl I have done over 200 deals  LOL.. but I also spend 3 to 4 months in hotels and on airplanes.. but I love to fly !!

Buy low sell high. If you have limited capitol (most of us do) then it makes no sense to buy a marginal deal. Search long enough and you will find the right deal. I have only bought two deals this year. One was for .50 on the dollar and the other at .75 on the dollar. This is in a hot market with lots of competition. I would rather do nothing than buy marginal properties that may lose money. Kellars mantra to make your money when you buy it is no secret. Many millionaires have made their money doing just that. I personally know investors with net worths over 100M and they have always bought right or didn't buy. I know that if I follow successful people and their guidelines that I increase the chances of having success. Kellar is one to listen to...and follow as well. I would bet dollars to donuts that these two deals will make more money than someone that bought three times as many marginal deals. Which camp do YOU want to be in.

I agree with @Jay Hinrichs that it is very unlikely that you will find a deal these days with the metrics you want to use.

The reason I said that I pay market is due to the fact that I buy underperforming properties.  So market is relative.  If a property can be bought with negative cashflow for 40% less that it is worth, then all I need to do is figure out how much money needs to be put in to make it hum. 

If you look for totally performing properties that are throwing off cashflow all over the place, they are likely to be overpriced.

The caution is that you need to have a really accurate proforma.

@Lee G.

When the author mentioned the "discount you require" he probably (hopefully) meant the discount rate that makes the net present value of all future cash flows from an investment equal to zero. This is also called the internal rate of return (IRR).

Cash on cash and ROI aren't as accurate or as comprehensive as IRR. If you are analyzing your investments based on ROI and cash on cash, you aren't seeing the full picture. IRR is much more accurate and closer to the true return on your investment over your hold period.

The IRR will tell you what you should purchase the property at. That could be at a 20% discount or a 20% premium. Setting a discount threshold from the purchase price that must be met is a poor way to sift through deals. It means you don't actually understand your returns and you are just using general rules of thumbs.

Originally posted by @Brandon Hall :

Lee G.

When the author mentioned the "discount you require" he probably (hopefully) meant the discount rate that makes the net present value of all future cash flows from an investment equal to zero. This is also called the internal rate of return (IRR).

Cash on cash and ROI aren't as accurate or as comprehensive as IRR. If you are analyzing your investments based on ROI and cash on cash, you aren't seeing the full picture. IRR is much more accurate and closer to the true return on your investment over your hold period.

The IRR will tell you what you should purchase the property at. That could be at a 20% discount or a 20% premium. Setting a discount threshold from the purchase price that must be met is a poor way to sift through deals. It means you don't actually understand your returns and you are just using general rules of thumbs.

 What I do here is setup a 5 year projection.  The key part is to have a strong understanding of how to get from non-performing to performing in the first year.  If you have your spreadsheet setup correctly, you should be able to see the value increase.  I would equate this to the "discount".

Once you have your projections, you can calculate the IRR with a formula on "Excel".

Originally posted by @Lee G. :

Every investors risk tolerance gene may be different as may be their target profit margin, cost of funds, exact business model, local market condition etc.

Lee,

Gary Keller's book derived from interviews with successful real estate investors.  The 20% discount formula makes sense in my opinion. Even the most successful investor in the world, Warren Buffett, likes to buy assets and companies at a discount. He calls it "buy with a margin of safety."

Why would one want to argue with a proven successful formula? How can investors flip properties for a profit if they cannot buy them for 70%-75% FMV? Like @Steve L. , I like to buy assets at a discount because it gives you more options.  If you have limited capital, buying properties at 75% FMV would allow you to preserve your working capital for new deals. The $1MM question is how do you get there?

Don't let the naysayers deter you from achieving your dreams. Getting there doesn't happen overnight.  You have to put a plan together and execute it. If your plan doesn't work, modify it and keep on going. As the old saying goes "it's hard to make it to the top. Once you made it, the view is incredible." How do you think the 1% get there? They got there by selectively not listening to advice from the 99%ers.

Best of luck.

Sorry for dredging up an old thread, but I wanted to start here before starting a new thread.  Anywho - I have a question about the repairs Keller talks about in HOLD.  In Hold, he says to look for a 10% discount to find your offer price.  However, he never adds back the cost of repairs.  So if I'm buying a 100,000 house at 10% discount my offer would be 90k. But if there is 5k in repairs, aren't I buying at a 5% discount (95k)?  I would have thought the repair cost would be reduced off the offer price to preserve the 10% discount?  

Any insight would be appreciated.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.