Real Estate Investors: Does Your Business Model Depend on Finding Needles in Haystacks?

by | BiggerPockets.com

In the world of real estate investing, it never ceases to amaze me how much banter I hear about “finding a good deal,” including the question I hear most often: “Where are all the deals?”

Part of what’s going on here is understandable in that newer investors looking for their first deal are stuck in the “analysis paralysis” stage. They’re worried they don’t know enough to avoid making a big mistake, so they try to lessen their worry by reading more articles, listening to more podcasts, asking more questions in forums, looking at more properties—and meanwhile, more decisive investors are out there buying properties. My advice? Of course you should educate yourself, but there also comes a point when you need to get your hands dirty without risking the whole farm. Real estate investing is a learn-by-doing business.

But it’s not just the nervous first-timers who are stalled out. One of the biggest differences I see between an investor doing lots of deals and one who’s not doing deals is what I’m alluding to in the title. In other words, be careful about focusing too narrowly on finding the next “perfect” deal because, frankly, there aren’t many perfect deals that fall into our laps.

Related: 5 Deal-Finding Tricks I Use to Buy Around 100 Properties Per Year

(If you really believe you can’t find any good deals, check out the article I wrote recently about creating a deal by focusing on the financing side of the equation, “No Inventory? Deals Can Be Made in Any Market. Here’s How.”)

Today, though, I’d like to touch on the various extremes that people go to in hopes of finding this mythical perfect deal.

BRRRR-strategy-deal

Making Money on the Buy

This is a great concept, and it is true that real estate investors make most of their money on the buy, especially wholesalers and retailers. What they forget to tell you is that it isn’t the only way to make money. After all, they’re usually only referring to short-term real estate investing, as opposed to a buy-and-hold approach.

When investing in a piece of real estate long-term, I think it’s much more important to invest intentionally and with purposeful plan in mind. In other words, before entering into an investment (i.e. buying an investment property or even buying a property you intend to occupy), the investor should have his/her exits and goals in mind.

This may shock some people, but I bought my first owner-occupied duplex 27 years ago at full retail price. And guess what? I still own it, and I’ve made plenty of money from it over the years. I even did several refinances, and I still cash flow $800 a month. (The price was $68,000 when I purchased the property, and it’s now worth in the $175,000-$200,000 range.) My point is that the place cash-flowed the whole time, and after the first cash-out refinance, my return on investment was off the charts.

Here’s the main point I’m making: In this deal, my focus wasn’t solely on finding a great deal at the lowest possible price, or in other words, searching for a needle in a haystack. Instead, I did this far-from-perfect deal (from a short-term, purchase-price-focused perspective) because I knew that long-term it was a winner.

Calculating Profitability

So, besides purchase price, what else do I think real estate investors should look at, especially when analyzing the profitability of a deal?

Personally, how long it will take to double my money or to get all of my investment dollars back is the biggest consideration.

Related: The Top 4 Ways To Overcome Paralysis By Analysis

The “Rule of Seventy Two” is a formula that helps to determine the number of years to double your investment dollars. Simply take 72 divided by the interest percentage on a loan or simply your rate of return. For example, if your net return on a rental property averages 8%, it will take you nine years to double your money.

That said, what you estimate as the profitability from your deal and what you will actually make on the deal are two separate things. Until you sell your investment and completely exit the deal, you don’t know how much you’ve really made.

This uncertainty is one of the reasons I don’t own all my real estate in one town, as this allows me to limit my exposure in any particular local market. In fact, my properties are in nine different areas throughout the county.

It’s the same when investing in mortgage notes. I may know what I’m supposed to make on the note by looking at the payment, interest rate, and term, but what I can’t predict is the real outcome.

If the borrower sells their home, refinances, or just plain wants to pay me off early, there’s nothing I can do about it, except maybe do the happy dance because a discounted note that’s paid off early usually has a higher yield.

use-debt

Looking for Deals in All the Wrong Places?

Now, before you go out looking for perfect deals, you need to know what a good deal looks like.

The answer is probably different for you than it is for me, as we all have varying levels of risk tolerance and experience. If I’m happy with the risk, the collateral, and the yield, then the next step for me would be to pull the trigger.

Once you know what you’re after, if you get in the game and network with others in the space, you’ll quickly learn all the latest strategies to get better deals. Some folks use all kinds of crazy marketing strategies, some of which I’m sure work great sometimes.

Personally, I’ve never really had trouble finding deals once I knew what I was looking for. Most of my deals came right out of the good ol’ MLS.

What Would I Do Differently?

Looking back, my biggest regret wasn’t buying the “wrong” deal. It was not buying more of the right deals. As an investor-Realtor at RE/MAX, I was selling about 75 properties a year to investors in a good market. My mistake was not using more leverage (private and hard money) to buy them all myself. I just wasn’t thinking big enough.

So, let me ask my BiggerPockets friends: Are you going down some rabbit hole looking for that needle in a haystack, or are you setting goals, planning, and truly building a portfolio of imperfect but good deals?

Let me know with a comment!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for over 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

16 Comments

  1. David Roberts

    Its the first time I’ve seen someone say that until you sell the investment and completely exit you really dont know if you profited or how much you made. That’s what I have been saying for awhile. Cash flow is great until big problems happen and eat up years of it. Thats my fear with holding for really long periods (15+ years). Just seems more sensible to rotate inventory as the market permits. But thats a whole different story lol.

    Really enjoyed this article.

    • Dave Van Horn

      Thanks for sharing David!
      I agree that sometimes it makes sense to rotate inventory as the market permits. I’ll often keep a new acquisition and sell an older property, as the taxes are lower due to it being a long-term capital gain, and I may have already depreciated it a good bit over the years. Plus, the older property may be coming due for more work.
      Best,
      Dave

    • TJ Thompson

      The rule of 72 is just a rough estimate and not exact math. Basically, it’s a quick way to calculate how long it will take to double your money, you just divide 72 by your percentage return. For example, 12% takes 72/12=6 years. 3% would take 72/3=24 years.

      There are actual math calculations to determine a more exact time frame (also depending on whether you roll your profits back in or not for compounding interest), but the rule of 72 is a great shortcut.

    • Dave Van Horn

      Hi Mohammad,
      TJ did a great job at explaining the rule of 72. It is a shortcut and estimate, rather than exact math. That said, it certainly beats not having a clue when you will make your money back or double it.
      Best,
      Dave

  2. Shawn Ginder

    Enjoyed the post, your statement at the beginning is so true: “Real estate investing is a learn-by-doing business.” I have learned so much in the last year after buying our first deal! My second and third deals are getting better through experience!

    • Dave Van Horn

      Hey, thanks for commenting Shawn!
      Real estate investing was certainly a learn-by-doing business for me as well. Once I had a few renovations under my belt, I had a much better handle on what things cost. Glad to hear your deals are getting better and you’re learning through experience at the same time.
      Best of luck,
      Dave

  3. joe kim

    80/20 rule…nothing will be perfect but you can only find the 20% gems….when you do enough deals to find the good, bad, and the ugly. I’ve been trying to sell my average and underperforming properties and converting them to good ones.

    • Dave Van Horn

      Hi Joe,
      I agree that it’s tough to predict which properties will stay gems over time. For example, sometimes taxes will increase faster than rent. I also like to regularly review my portfolio to see which properties are performing or underperforming and then strategize from there.
      Best,
      Dave

  4. PJ Muilenburg

    That’s great Dave. I remember that very lesson in the book Building Wealth One House at a Time when I was starting out, and it really helped me relax some and start making offers. He noted his first purchase which he also paid market price for, nevertheless 30 years later he still owned the house and made plenty of money from it.
    I have recently been disappointed in my last deal because it wasn’t quite as sweet as my goal. But it was a good deal, though not perfect, not a needle. And I honestly could potentially hold it for 40 years and make bookoos of money on it.

  5. Matt NA

    Your article spoke to me as I suffer from analysis paralysis. I’ve tended to talk myself out of getting back into real estate investing. Mainly due to the pain of losing so much with the last crash, then telling myself there’s too much competition, over-inflated prices, no deals, etc.

  6. Larissa Macatangay

    I’m feeling the same way as Matt. I’m reading and listening to so many podcasts and I’m on information overload. I want to get into the Florida market, even though I live in Chicago, but people are saying to start out in Chicago where I’m most familiar with the good areas to invest in. I look at multiple listings all over and study the market, but in the end I’m confused with the over abundance of areas and places I’m looking at. I do have limited funds as a first time investor, but I don’t want to settle for a place where I will not capitalize on my investment. I just have to dive in and hopefully the second time around, I will feel comfortable with the knowledge I have under my belt.

  7. Louis Presley

    What I like about real estate is you can execute poorly and still do well. For instance, when I bought my 1st rentals 35 years ago in the DFW market we didn’t experience much appreciation for years. Even when other parts of the country was enjoying hyper appreciation before the crash in 2009 the DFW market just didn’t appreciate the same way. Didn’t crash the same way either. But, the rents did increase and cash flow is why you own rentals any way. It’s like you get paid to play. If you buy at the “wrong” time and real estate prices go down right after you acquire who cares just continue to collect the rents and sell at a later date when prices go back up again. After all your getting paid in mean time. Same applies if you pay to much even if you pay market rates just wait awhile maybe along while continue to collect the rents and then sell later. Guess what, even if you have a negative cash flow and your renters are paying 90% of your hold cost then you have a forced savings plan with a great rate of return. Where else are you going to get a savings plan were you deposit $100 and someone else deposits $900 (renters) you get to take a depreciation deduction to offset the negative cash flow and someone else (renters) pay down your mortgage. Eventually if you sell and the property has appreciated you get that as well. I still own some of the rentals that I bought 35 years ago free and clear. And finally, yes the DFW market is experiencing hyper appreciation. Not sure it matters to me now because I don’t plan on selling. In fact I think my favorite hold time is forever. Looking back I would have been better off not selling any of my properties. Happy Investing

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