Realistically, what is a "good deal"? Especially for a new person

Buying & Selling Real Estate
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Realistically, what is a "good deal"? Especially for a new person

Josh Lyons
Charlotte, NC · Member since 2016 · 82 posts · 41 votes

I'm new to BP and trying to find and buy my first investment property to buy and hold. I'm in Charlotte, NC. I've read a lot about the simple and very important advice that "you make your money when you buy." You have to get a good deal up front. My quick question... for a new investor without many connections, resources, access to MLS, etc., how good of a deal should I be looking for realistically? For example, should I be expecting to find something 10% or 20% below it's market value? How prevalent are the 10% or 20% below market value deals? What about in a sellers market? I'd also appreciate hearing any stories about how you found good deals... such as the percentage they were below market value and the method you used to find them (i.e. through a connection, from MLS, "driving for dollars", direct mailing...). Thanks.

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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes
8y

Well, for starters, percentage below market doesn't really matter that much on a buy and hold; there are markets where you could buy a property 50% below market and still not have any cash flow on a rental property. Of course, you don't want to be upside down if you have to sell, so it does matter, but theoretically you could be upside down on a property forever and make a boatload of money on it in rent.

Work your way backwards. Figure out what kind of property you want to rent out, where, and to what class of tenants. Do some research and see what market rents are for what you want to do. Now figure out your baseline costs - property management, taxes, insurance, etc. Now look at property that meets your goals - if you buy that property, how much does it cost you to hold that property every month? More than the possible rent? Bad deal for buy and hold. Break even? Probably a bad deal unless you know there is about to be massive appreciation in value and rent. Way less than the possible rent? Maybe a good deal, so long as you have looked at other factors - it's not in a rapidly depreciating area, for example.

Market value is really just a running average of numbers, constantly shifting. Technically, market value is whatever you pay, because you are part of the market. Potential market value is something else altogether. 

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes
    8y

    Well, for starters, percentage below market doesn't really matter that much on a buy and hold; there are markets where you could buy a property 50% below market and still not have any cash flow on a rental property. Of course, you don't want to be upside down if you have to sell, so it does matter, but theoretically you could be upside down on a property forever and make a boatload of money on it in rent.

    Work your way backwards. Figure out what kind of property you want to rent out, where, and to what class of tenants. Do some research and see what market rents are for what you want to do. Now figure out your baseline costs - property management, taxes, insurance, etc. Now look at property that meets your goals - if you buy that property, how much does it cost you to hold that property every month? More than the possible rent? Bad deal for buy and hold. Break even? Probably a bad deal unless you know there is about to be massive appreciation in value and rent. Way less than the possible rent? Maybe a good deal, so long as you have looked at other factors - it's not in a rapidly depreciating area, for example.

    Market value is really just a running average of numbers, constantly shifting. Technically, market value is whatever you pay, because you are part of the market. Potential market value is something else altogether. 

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  • Josh Lyons
    OP
    Charlotte, NC · Member since 2016 · 82 posts · 41 votes
    8y

    Thanks JD.

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  • Shiloh LundahlPro Member
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    8y

    @Josh Lyons I will give you an easy definition for a good deal for a new investor. A good deal is one you don’t lose money on.

    When you are new, you are likely going to make plenty of mistakes. Finding a mentor or partnering up with an experienced and honest investor on a first deal to learn the process is good advice for someone just starting out.

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  • Alex CraigBusiness Member
    Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
    8y

    @Shiloh Lundahl  no doubt.  A deal that cash flows because the home is desirable to tenants and maintenance is minimal is better then getting a deal with 20% equity that looks tired and has a lot of deferred maintenance shortly after the purchase. I have seen a lot of people exit real estate all together because their purchase at 60% of value is a huge money pit.

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  • Josh Stack
    Investor · Cramerton, NC · Member since 2017 · 336 posts · 198 votes
    8y

    Hey @Josh Lyons,

    Good question and one that I've been asking myself as I have gone head first into real estate investing. My wife and I when we started out were expecting to make 10-12% CoC ROI returns but simply aren't seeing that in the market as we have gotten to know our market and have an understanding of what's really happening. No doubt returns like this are possible but you have to come with some sort of value add element.


    Finding good rental properties on the MLS, paying around market rates for them and renting them out we are seeing returns in the 6-7% range for unleveraged investments.

    I agree with the others in this thread that ultimately what one has to do is get the ball rolling and its more important to get the first deal done and in the books, roll the learnings into deal two and repeat and so on.  Don't let the first deal be a loser by any means but the real value is in the learning and experience that comes with it.  The financial returns can come later.

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  • Ihe O.
    Investor · Laurel, MD · Member since 2016 · 395 posts · 191 votes
    8y

    One that lets you sleep at night.

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