Just because the numbers work, doesn't mean its a good deal

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Just because the numbers work, doesn't mean its a good deal

Devin JamesPro Member

Developer · Orlando, FL · Member since 2018 · 502 posts · 306 votes

The numbers might look great in a spreadsheet…

But here are a few things the financial model won’t tell you:

- What do the neighboring properties look like?

- Are there active buyers in the market?

- How long will it actually take to get to the finish line?

Sometimes it’s not about whether the deal can work—

It’s about whether it’s worth the time, risk, and capital.

Gut checks, local insight, and patience matter.

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Chris SeveneyBusiness Member

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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes

Quote from @Devin James:

The numbers might look great in a spreadsheet…

But here are a few things the financial model won’t tell you:

- What do the neighboring properties look like?

- Are there active buyers in the market?

- How long will it actually take to get to the finish line?

Sometimes it’s not about whether the deal can work—

It’s about whether it’s worth the time, risk, and capital.

Gut checks, local insight, and patience matter.

Also the numbers are always wrong - the moment you put them into the spreadsheet they are wrong as I have yet to meet anyone who can predict the future.

As you mention its about risk - and what are the risk factors you are taking on that can impact the number as well as how likely is it to happen. For example we invest in mortgage notes a lot and if a borrower is behind and has $500k equity in their home - if we bid it based on a foreclosure but bankruptcy is worse situation for us, chances are much higher they are going to file BK so we better underwrite it based on that as well.

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
1y
OK. I'm going to agree, and disagree here.
A deal IS all about the money. If the numbers work, it's a good deal. Here's where I would say instead, "Just because the numbers show a property is a good deal, doesn't mean you should buy the property". Does that make sense?
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- Devin JamesPro Member
  OP
  Developer · Orlando, FL · Member since 2018 · 502 posts · 306 votes
  1y
  Quote from @Joe Villeneuve:
  
  OK. I'm going to agree, and disagree here.
  A deal IS all about the money. If the numbers work, it's a good deal. Here's where I would say instead, "Just because the numbers show a property is a good deal, doesn't mean you should buy the property". Does that make sense?
  
  Agreed
  If the numbers take into account the external factors mentioned and still work, then I say go for it.
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Eric Gerakos
Investor · Costa Mesa, CA · Member since 2016 · 1k+ posts · 1k+ votes
1y
Agreed. Some D properties look great on paper. I always consider what kind of tenants are going to want to actually live in the property and how likely are they going to be to pay the rent. In D neighborhoods not very likely. The paper cash cow can quickly turn into a negative money pit.
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Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
1y
Good post. I'll just add this....most younger people forget to put a value on their own time. When I was a young entrepeneur starting out with different businesses, I was advised by an older friend to always put a value on your time. It was suggested that $100 per hr was about right. Use this when doing your budget and after a project is done when figuring out your profit or loss.
You'd be amazed how much of your precious time can sunk into a project...and sure maybe you end up with a $20k profit on paper...but you invested 100's of hours into it. Hours that could have been spent on bettering your life. Was that a good deal? I would say no.
Just my $.02....
2 Reply
- Joe VilleneuvePro Member
  Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
  1y
  Quote from @Bruce Woodruff:
  
  Good post. I'll just add this....most younger people forget to put a value on their own time. When I was a young entrepeneur starting out with different businesses, I was advised by an older friend to always put a value on your time. It was suggested that $100 per hr was about right. Use this when doing your budget and after a project is done when figuring out your profit or loss.
  You'd be amazed how much of your precious time can sunk into a project...and sure maybe you end up with a $20k profit on paper...but you invested 100's of hours into it. Hours that could have been spent on bettering your life. Was that a good deal? I would say no.
  Just my $.02....
  More like 4 or 5 cents.
  0 Reply
Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
1y
Quote from @Devin James:

The numbers might look great in a spreadsheet…

But here are a few things the financial model won’t tell you:

- What do the neighboring properties look like?

- Are there active buyers in the market?

- How long will it actually take to get to the finish line?

Sometimes it’s not about whether the deal can work—

It’s about whether it’s worth the time, risk, and capital.

Gut checks, local insight, and patience matter.

Also the numbers are always wrong - the moment you put them into the spreadsheet they are wrong as I have yet to meet anyone who can predict the future.
As you mention its about risk - and what are the risk factors you are taking on that can impact the number as well as how likely is it to happen. For example we invest in mortgage notes a lot and if a borrower is behind and has $500k equity in their home - if we bid it based on a foreclosure but bankruptcy is worse situation for us, chances are much higher they are going to file BK so we better underwrite it based on that as well.
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6 Reply
Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
1y
4 or 5 cents for me, yeah, but most people are worth more, Lol....
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Steve K.
Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
1y
100% agree. Underwriting a property is equal parts art and imperfect science. Some of our properties that looked the best on my spreadsheet have performed the worst, and others that looked absolutely terrible on a spreadsheet have performed the best (by far). The biggest factor in this phenomenon is location, which is why location, location, and location are the top 3 things that I focus on when looking at properties now.
2 Reply
- Jay HinrichsBusiness Member
  Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
  1y
  Quote from @Steve K.:
  
  100% agree. Underwriting a property is equal parts art and imperfect science. Some of our properties that looked the best on my spreadsheet have performed the worst, and others that looked absolutely terrible on a spreadsheet have performed the best (by far). The biggest factor in this phenomenon is location, which is why location, location, and location are the top 3 things that I focus on when looking at properties now.
  
  Back in the 60s there was a pretty famous advertisement with a picture of a beautiful stately oak tree on a knoll. And that was the gist of it.. value is directly related to where that Oak tree was.. in this case prime CA. real estate.. take that same oak and but it in West texas and maybe not so much !!
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Becca F.
Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes
1y
I agree on the comments, location, location, location and the numbers rarely turn out to be exactly like the projected numbers.
I ran the numbers on a renovated property (seller did renovation) with some minor repairs after the inspection and my cash flow on paper is in reality -$300 to -$500 a month. Constant repairs called in by tenant. I bought two of these class C type homes in Indianapolis (sold the vacant one somewhat recently). I don't know if this area will appreciate enough for my costs each month.
If I knew I was going be negative cash flow, I would have bought one $450,000 to $500,000 home in NorCal or Nevada, which would have higher appreciation.
I've had California investors contact me and show me their numbers on properties in the Midwest and the South. Without me visiting this city and neighborhood and getting to know this area in detail, I'm not informed enough to help you make a decision.
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Ryan RomingerBusiness Member
Real Estate Broker · Indianapolis, IN · Member since 2018 · 340 posts · 144 votes
1y
Absolutely agree — numbers are just one piece. The neighborhood vibe, buyer demand, and real project timelines can make or break a deal. Gut checks and local knowledge save you from a lot of hidden headaches. Patience is huge too — not every "good on paper" deal is worth chasing.
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Eric FernwoodBusiness Member
Realtor · Las Vegas, NV · Member since 2014 · 995 posts · 1k+ votes
1y
Hello @Devin James,
You are absolutely right about the numbers being misleading. My first investment was a Class C (D?) four-plex in Houston, which appeared to be a cash cow on paper and I estimated an ROI between 12% and 14%. However, reality proved to be quite different.

To summarize, I typically lost about $1,000 each month. This is because I failed to consider the behavior of the tenant segment attracted to this type of property. For instance, I assumed that if a tenant signed a lease, they would remain for a year. In reality, my average tenant stayed only five to seven months. I learned that with cash-based tenants, leases hold little significance.

I also did not anticipate the high number of evictions, averaging about one every two months. The eviction process took two to three months, during which tenants would exploit the system to live rent-free.

In short, the second-best day of my early investment career was purchasing that property. The best day was selling it.

The lesson I learned was that the tenant segment is the most critical element, not the property itself. I learned to select tenants with the right financial behaviors and then purchase properties that would attract them. This shift in approach has proven highly successful.
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- Devin JamesPro Member
  OP
  Developer · Orlando, FL · Member since 2018 · 502 posts · 306 votes
  1y
  Quote from @Eric Fernwood:
  
  Hello @Devin James,
  You are absolutely right about the numbers being misleading. My first investment was a Class C (D?) four-plex in Houston, which appeared to be a cash cow on paper and I estimated an ROI between 12% and 14%. However, reality proved to be quite different.
  
  To summarize, I typically lost about $1,000 each month. This is because I failed to consider the behavior of the tenant segment attracted to this type of property. For instance, I assumed that if a tenant signed a lease, they would remain for a year. In reality, my average tenant stayed only five to seven months. I learned that with cash-based tenants, leases hold little significance.
  
  I also did not anticipate the high number of evictions, averaging about one every two months. The eviction process took two to three months, during which tenants would exploit the system to live rent-free.
  
  In short, the second-best day of my early investment career was purchasing that property. The best day was selling it.
  
  The lesson I learned was that the tenant segment is the most critical element, not the property itself. I learned to select tenants with the right financial behaviors and then purchase properties that would attract them. This shift in approach has proven highly successful.
  Sounds like great tuition!
  
  Thank you for sharing
  [email protected]
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