What Makes A Good Deal?

Question

I get calls regularly from different BP members asking for my thoughts. Today, a member sent me an address wanting to know my thoughts on the property. My response was: can it be purchased for 20% under market. Of all the rules/suggestions/guidelines to me this is probably the most important. You make your money when you buy. That is the Gary Keller mantra. I see two reasons for this: a guaranteed instant profit plus the ability to realize that tax free when selling. Another reason is market fluctuations. If you buy under market and it drops 10% you may not be underwater. So whether you want to flip or buy and hold, I believe getting a deal on the purchase is most important. The NY as well as west coast markets scare me. Investors there are often forced to pay ridiculously high prices and HOPE for appreciation. So, what are your thoughts? What makes a good deal?

Jonathan Towell · Answer

You're right that this is a common question. When I got started investing, I wondered why nobody just published the magic "good deal ratio." I kept thinking that I should just be able to run math on every deal, sort in a spreadsheet, and choose the one at the top.

The problem is the infinite variables, many of which are personal.

For example, to a new investor, the 20% discount rule is a great one. This person needs to ensure cash flow and minimize risk.

To an older investor, no discount may be more desirable because the older investor has cash reserves to bank on appreciation over cash flow.

I could go on all day with examples. Bottom line: I don't think there is a universal good deal.

(By the way, this is why mentors are so important. They help us analyze deals on a personal level.)