Is the 1st Deal a Myth?

24 Replies

I'm curious to see how much of a myth the 1st Deal actually is.

The Myth I'm referring to is "get your first deal and it's off to the races". As a new investor, I the more I listen to podcasts (and not just BP's) the more it seems like "if you do your 1st deal, the doors will open up and you'll be able to acquire as many properties as you like, as quickly as you like".

Obviously, this sounds ridiculous and I'm also exaggerating a little bit. But, assuming it isn't ridiculous, at what point do you just do a good deal, regardless of size, just to say you've done one?

I want to be in the small-multi space to start. Anything from 2 to 20 units. However, there is a huge difference between 2 and 20. There's a pretty good difference between 4 and 6, to be honest. Is it worth it to just acquire the most affordable good deal I can in order to build that reputation, rather than try for something a little more expensive for more cash flow?

Scott,

There is some truth, but also some exaggeration involved. Doing one deal does not mean you are automatically going to start picking up tons of properties. You're ability to grow and scale will depend on your access to capital and the professionals you surround yourself with. After you've done one transaction and can speak intelligently about your successes and failures, you will start to earn the trust of others and expand your network. Generally speaking, things do get easier after you have done your first but it's not 100% black and white.

My personal recommendation is to start off on something smaller (2-4 units) to get your feet wet and to build up your track record. The first deal is not going to let you quit your job, but it will allow you to make and learn from mistakes, and hopefully also give you more financial flexibility. 

I think of acquisitions in terms of "what will this unit cover for me?" I don't take the conventional route of "i need x number of doors producing $100/month so I can replace all of my income." In my case, each property has a purpose. I live in DC and my primary residence is in an A+ neighborhood, so the cash flow will not be as great once I move out and start renting it, but i will benefit from long term appreciation, which I view as something to cash out for say a child's college education fund, or supplementing retirement. I also have another unit in a lower income neighborhood where the cash flow is high; for this one I have ear marked it as my "vacation fund." I'm currently working towards closing a deal out of state with a business partner, where cash flow opportunities are higher and acquisition prices much lower compared to where I live. Will look to that income to help cover simple living costs (say my cell phone and internet bills).

Hope this helps, I'm sure others will have different opinions but that is the beauty of BP, lots of diverse and interesting perspectives!

The first one is the hardest. The 2nd one is the 2nd hardest, and so on. In fact, I bet of people who do 1 deal, half never move on to number 2.

It is very cool the feeling of achievement when the first deal is completed. However, you get some issues in the process and headaches that you didn't see coming. 

The second deal, it is equal as tougher or even tougher than the first one because even if you have done it already you are never gonna be able to fully control the unexpected issues. So, mentally you know you already have done it once but you already know is not gonna be easy. 

I guess after the 5th or 6th when you have been exposed to different problems it gets easier because you know exactly what to do and how to solve it.

We only have 2 properties so far and in my experience I have found that you 100% have to have done at least a deal or 2 for people to take you at least a little seriously. In my opinion, it's more valuable for new investors to get a few base hits under their belt and stop holding out for the home run. Everyone from realtors to lenders to other investors have been more willing to work with us now that we have taken some action. I think this is probably what people mean, is that as you keep going along, all of those relationships get stronger and scaling will become easier. 

I'd narrow your criteria by return, not size. That way if you know you want to make an 8% cap rate, you can skim everything that interests you until you come to that. When you come to that, PULL THE TRIGGER! My market is dominated by SFH's that are great deals. Off market, they're just plentiful. However, people REALLY want multi right now. I've seen firsthand how when people finally get multi (that 8 unit they dreamed of) how scared they get because the numbers are so much bigger. That's why it's so important to have your criteria set and every time you get scared, go back to the fact that it meets your criteria and push forward.

@Scott Kimberly

The first deal is definitely the hardest, but there are plenty of roadblocks that come up on subsequent deals as well.

However, doing our first deal gave us the confidence gradually to move forward on future deals, and that does snowball overtime. At this point 5 years later we are about to cross 50 units, and it never would’ve happened if we hadn’t taken the leap of faith on that first one!

Originally posted by @Scott Kimberly :

I'm curious to see how much of a myth the 1st Deal actually is.

The Myth I'm referring to is "get your first deal and it's off to the races". As a new investor, I the more I listen to podcasts (and not just BP's) the more it seems like "if you do your 1st deal, the doors will open up and you'll be able to acquire as many properties as you like, as quickly as you like".

Obviously, this sounds ridiculous and I'm also exaggerating a little bit. But, assuming it isn't ridiculous, at what point do you just do a good deal, regardless of size, just to say you've done one?

I want to be in the small-multi space to start. Anything from 2 to 20 units. However, there is a huge difference between 2 and 20. There's a pretty good difference between 4 and 6, to be honest. Is it worth it to just acquire the most affordable good deal I can in order to build that reputation, rather than try for something a little more expensive for more cash flow?

Most people don't do an amazing first deal. The differentiation happens after: either they keep buying crappy deals, or they evolve and learn to make more money with less effort and fewer resources invested. Doors don't just magically open up after a deal is bought. You just get braver and learn from your experiences. Your mindset may shift, and this will open doors for you. I know many people that keep buying the same crappy 1% deal SFR over and over and over though. Some don't snap out of it until after deal # 8 or 10 when they realize they're not making money.


Cash on cash return is more important than gross cash flow when you're a new investor. You don't have such a large pool of startup funds that finding an asset to place it in is going to be a problem. You want to build revenue early, and you do that by maximizing yield if you're going to be a buy and hold investor. A lot of people are settling for less in this market too- don't buy below a 10 cap IMO. 

I don't think theres a huge different between 4 and 6 units, btw. Even if you're talking the diff between conventional and commercial financing. Also, I recommend commercial financing on 2-4 units to start- the relationship with a commercial lender is worth way more than the fixed rate on a conventional loan. 

First things first, Make a plan. IE>decide why you are investing, at what point do you want to quit your 9 to 5 or do you want to keep it? The plan has to be thought out.

Second, do you want to own free and clear or do you want to be leveraged? Is your personal home going to be leveraged? 


Third, do some due diligence on several properties. Run the numbers and get familiar with what the numbers in the area you have decided to buy in.

Fourth, start figuring out what you can put down and how you want to pay for more doors. 

Here's is where I see more people going wrong.  They see a property for 100 K they look at the rent of 1000 a month and think that it sounds good. They don't look into how long a renter has been there or the turn over rate.  They forget to do a walk through or they don't know what to look for they do a walk through and miss the fact the foundation has a crack or the foundation is sinking.  If you don't know what to look for in a walk through then you need a professional to walk with you.  I personally take a level with me a good 4 foot one or I take the new laser level I bought for a couple hundred dollars.  I then check the front of the house to see if its level, the back of the house, and all sides, using this level i check to see if the windows are perpendicular to the house or if they are off center.  This will tell you if it has sunk or is sinking. I check the floors to see if they are level, and I check cabinets. I look in cabinets for plumbing and in the basement or the crawl space to look at plumbing.  Make sure you know what to look for.  I look at the roof and check for leaks. I check insulation information that has to be inside the house. I also look for any and all issues not mentioned here. 

I would go to someone in my area that buys properties and ask if I could go with them on a home inspection that they do. This might give you better ideas of what to look for.

Ask a million questions about the house from the seller.  When was the water heater put in, the furnace, the air conditioner, the toilets and tub. Ask what they have fixed and when. 

This is the most important step.  If you think it needs a lot of work besides these things then you should not invest.  

I have a friend who does all the work himself he is a GC and he bought a house and did not do a walk through. He ended up hurt badly.

Make sure you know what you are looking at.  

IF you have questions just ask and someone here will try to help.

@Scott Kimberly every deal gets easier. I just closed on a house last week and we had at most 3 hours into the whole process. That is including viewing the property, offer, signing paperwork, bank and closing. Everything in life gets easier with experience. 

Another reason every deal gets easier is momentum. If every deal has $400 cash flow, here is what the numbers look like:

1 = $400

2 = $800

3 = $1200

4 = $1600

....

20 = $8000

I am sure you have heard of the debt snow ball, well this is the cash flow snow ball. Every deal you add allows you to build up cash faster. So on deal one you are worried about where to get the down payment, but each deal you do makes it easier to build up cash faster. 

You are your own limiting factor. People make excuses to not get started. Why are you questioning deals 2-20 when you have not even closed deal one? You are putting barriers in front of yourself that don't exist anywhere but inside your head.

My recommendation for the first deal is don't wait for the perfect deal, because it usually never comes. Just find one that is "pretty good" and in a good location. Even a mediocre deal will turn out good given enough time. That is because over time rents and property values increase. 

It gets easier because you gain experience and the cash flow snow ball that gets you moving faster.

Thank you, everyone, for your input! I was nervous asking this because it seems so ridiculous, but at the same time the doubt I had on the subject was driving me mad.

@Michele Wax so many good ideas and tips! Thanks!

@Joe Splitrock Im glad you mentioned limiting factor, because I know there are times I get in my own head. However, there are times when I'm not sure if its my brain or if its lack of knowledge.

For instance, a quick glance at multifamily homes in New Haven (a city very close to where I live) reveals that the cheapest I can find is $150k. Cheapest, but probably not best. In order to get a downpayment for a traditional loan on such a property, the lenders I've spoken to would want $37,500 to $45,000. Money I couldn't possibly accumulate at one time for years and years just from a 9-5 job, spouse included. Going off the sentence right before this, that is an example, to me, of a mental barrier as well as an actual financial barrier.

Now, I also found a 3 unit building in the same city for $300k. Ive previously found buildings in another nearby city with 6 units for $300k. All things being equal (and I know they're not) why go with the 3 when I could theoretically make twice as much on 6? I know I doubled the down payment size and doubled the price, but for argument sake, it's the same amount of legwork and same very large amount down for those.

I realize that this is a gross over-simplification, there are lots of other variables outside of purchase price and cashflow that will make one better then the other, or kill both, but that is something I am struggling with. I realize there are barriers, some I can control and some I can't. All of them can be broken, but some times I need some help from a bunch of wise folks who have been there before me.

@Scott Kimberly

It is absolutely true. This is speaking from personal experience.

After I purchased my first two duplexes in Chattanooga, some basic networking allowed me to walk into a third deal in Knoxville within 2 months, seller financed and 22% CoC. So far my best deal.

Now Im struggling to get my first apartment building as a syndicator but I know that after this first one, the next will come, and then even more and more opportunities will open up. I just gotta get past that initial launch phase.

@Scott Kimberly I highly suggest going pro for the unlimited access to the calculators if nothing else. I've been using them almost daily to analyze properties in my area and if not for the calculators I probably wouldn't have even considered some of the properties because they looked too expensive or needed too much work. I just re-analyzed a property yesterday that I had written off as needing too much work before actually running the numbers and now I see there's potential in it I hadn't considered before. I'll be going to see the property with my realtor later today. 

P.S. I'm also looking for my first deal so all I can say without sounding like a poser is if the majority of the people who are successfully investing in real estate are all saying "yes it gets easier" I'm lead to believe the mythbusters would stamp PLAUSIBLE on this myth.

@Scott Kimberly I don’t think the first deal is a magical thing that will result in a windfall. But action leads to more action. It gets easier because you learn more and meet more people if you keep going.

My first property was just good (not great) but it got me out of the books and into the real world. It was a SFR. Then I joined investor groups in my area. I built my team. I then did a BRRRR on a duplex and made money on the cash out refi. My wife then found another investor close to retiring that has multiple 4 plexs he is willing to sell me over the next few years because she called to get his current rents for comparison. These other deals weren't a result of my first deal necessarily, it was because I learned and just kept going. But I needed that first one to prove to myself this was all possible.

@Russell Brazil is right, each deal has its challenges, but the first will seem to be the hardest. Either you have it in you or you don't. It isn't easy, and it hasn't gotten any easier. I'm just more calloused to the work involved. 

@Scott Kimberly - The biggest plus of doing the first deal is it gets you out of "Analysis Paralysis".   I researched and read about real estate for 9 years before taking the plunge.  I thought I could learn it all ahead of time so that my real estate career would be simple and flawless.  I realize now how hilarious that thinking was.  I learned more in my first year of business owning properties than I did in the previous 9.  You can't eliminate risk but you can mitigate it.  And the good news is, most of the risk can be compensated for by putting in extra work, more hours, more elbow grease.  As far as not having money, you can research strategies.  There are lots out there and you just need to find one that works for you.  I had $0 and figured out how to get to 127 rentals in 5 years.  And I'm no real estate savant.  I just put together a plan and stuck to it with dogged determination.  I take all of my cashflow and put it right back into my properties to pay down the mortgages.  I plan to be at 397 rentals in the next 5 years to complete my 10 Year Mission.  It can be done.  But if you don't start, next year at this time you'll still have ZERO properties....unless you buy that first ONE.

As others have said the first deal is the hardest, so you've got to get it out of the way before you can move on to "easier" deals.

My wife and I have a quip that describes our experience:  With each deal we learn a new lesson.  And by lesson, we mean we pay money for our mistakes.  But, we strive to not make the same mistakes twice, and each new deal has a lower cost for lessons.  :)

@Scott Kimberly

Until you do deals, you’re a talker and not a doer. Amazingly, having done just a few, and talked bout them with some degree of excitement, I’ve had 5 people interested in handing me money. Most of them I’ve held back this far, wanting to get my current deals through to make sure I know what I’m doing. Not comfortable taking other people’s money until I’ve proven that I can get this done on a few deals. But I think it’s true that success attracts success. Not many people have done real estate and if you it with some success some people will find you highly successful. Be ready for stardom.

Which brings me to another point. If you haven’t done a deal, don’t go asking for money outside of family. Most people will look at you and think, “what do you have to offer?” The answer is nothing until you’ve done some successful deals. Do some on your own dime, then modestly brag or share and you’ll find more people interested. Takes some time.

@Christian Becker - Agree 100%.  We now have investors asking us how/when they can invest.  It's kind of a funny psychological effect.... we pitch different investors on an opportunity and get a bunch of "no's".  Then we get a "yes" and move forward.  The deal goes well, investor makes money.  Then months later when we bump into the "no" investors again, they ask "Did you guys end up getting that building?"  When we tell them yes and all the positive things that happened with it and how happy the investor is....all of a sudden they change their tune... "Let me know about the next one you do.  And make sure to come to me first!"  So that's one way we've been getting more investors.  Another is, we have investors that we've done several deals with.  After a few successful ones they tell a friend, or they ask to do a bigger deal, or partner up with a friend to do a bigger deal (people with money know other people with money). When I started my 10 year plan, I didn't know exactly how we'd get it all funded but if you keep plugging away, deal by deal.... somehow things just line up and come from unexpected places.

I've done 2 deals so far and the search for the 3rd deal has not been any easier. Granted on this 3rd deal I'll have 1 year of experience, a way better idea of how to evaluate a property, more connections, etc. all of these things help, but I'm still facing new challenges.

The challenge for this 3rd deal is capital, which wasn't an issue for the first two.

After your first deal, the next are not going to fall into your lap, but you have to get started somewhere. So many people learn about real estate investing and never put their learning into action. 

@Scott Kimberly

As others have said, it's not just about doing the first deal, it's about networking and connections, your team, your lenders, your credit, your persuasiveness and tenacity, etc. Etc.

EVERY SINGLE successful RE investor began their journey with their first deal, so no, it's not a myth. And from personal experience, doors opened and people took me seriously once they saw that I took the first step and bought my first property.