HMW #134: How do you know if you found a good real estate deal?Dec 27, 2023
Read Time: 6 minutes
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We've all heard the refrain that you make your money when in real estate when you buy, not when you sell. This implies that good deal finding and getting things at a discount are the keys to success. I (Alan) wouldn't say this is the only way, but it sure does get you off on the right foot if you identify and purchase a good deal.
But how does one actually know if they've found a good deal? I am here to share the 3 clues I use to identify the best deals so you can learn how to weed out average and bad ones and only focus on winners.
Are you up for reviewing these clues together?
I'll take that as a emphatic yes.
Clue 1: Comparison to others in your buy box
I've written previously how to run the numbers on a real estate deal to make sure it cash flows. All great deals on long-term and short-term rentals cash flow day 1, so we must start there.
But if you are running a very specific buy box (as we recommend) and you have run the numbers on at least 20 different deals, you'll have a pretty good idea of what the rent-to-price (RTP) ratio is. For example, if you want to know if your neighbor's duplex that rents for $4,000 a month is a good deal at $450,000, you figure out the RTP of this and of comparables (comps).
Now, the comps have to be like kind properties in the same area. This duplex could be an amazing deal in New York City but a terrible deal in Topeka, Kansas. So, only look at comps in the same zip code to get any real usable data. Generally, the closer the better.
Now the RTP ratio of this duplex deal in your hometown is $4,000/$450,000, or 0.88%. Now, run the numbers on 20 of those sold comps in the area on Zillow to determine what the average RTP ratio is. If you are see the average is 0.88% on all the others as well, then this looks like an average deal.
If the comps are coming in 0.98%, then you have a below average deal. And if the comps are at 0.77% then you know you have an above average to great deal. You want to juice as much rent as you can out of the purchase price and the RTP ratio tells you where you stand.
Unfortunately, there is not just one metric to use to determine great deals, but only clues. And this is the clue I usually start with because I know that if I have a $450,000 budget I want to get a higher RTP ratio than any others in the same area.
And if it's not there immediately, I know I have the following steps I can take to make sure I do get the best RTP ratio in the area:
- Offer a much lower price so that I do have the best RTP ratio.
- Recognize from the comps that maybe the current rents are way below market and just need to be adjusted at lease end up to get me there.
- Recognize I can put some money into renovating to get the rents up to a numer that works. Just add this extra cash needed to do this to your purchase price to get a close RTP ratio when project is done.
These steps are so much better than just looking at the Zillow Zestimate and comparing properties that way, don't you agree?
That's right! And you don't even need a badge.
Clue 2: Insider Information
I bought a bar across the street from my listing once in Brooklyn. Why? Well, my flip was under contract with Shark Tank vet Barbara Corcoran who was buying the first million dollar property in Red Hook at the time. I knew this would bring a lot of press and interest into the neighborhood and I was able to low ball the local pub to capture and cash in on this area's new found fame.
Now, I quickly learned owning a bar is not the same as owning real estate, but I did get to ride the wave of Red Hook's gentrification for a few years.
This is what constantly doing deals (or at least evaluating deals) and being an active investor leads to: you know things first. It could be that you know a subway stop is being added, or a food hall, or some other lead that no one else knows about that will great demand in the area. The demand of more traffic, or more buyers, or more people moving to the area will always make real estate prices go up.
And if you are just getting started and don't have a network or ability to a deal yet, join Facebook groups of the areas in your buy box to get the latest gossip. This is loaded with rumors, some incorrect, but you can get a pulse on the area from digging online more so today than ever before.
Do you think this is something you can handle?
Well, this is a perfect training ground for you then! Spy on your buy box's neighborhood for good deal clues.
Clue 3: Your extended team agrees
We want to be your real estate mentors here at House Money Media, and we offer our coaching and advice daily in our Discord membership.
But remember to always get a second set of eye-balls from your real estate agent, mortgage lender, property manager, contractor, or all of the above. It doesn't hurt to bounce it off a fellow investor, even if they invest in a different product type or area. Getting feedback from others is important to make sure you aren't missing anything obvious.
Rarely will your deal get stolen using people you will use to help you acquire or maintain the home, but nothing beats advice from those doing real estate every day.
And that's it, those are 3 clues to recognizing a good deal! And before you know it, you'll recognize a good deal immediately because you have run so many comps in the same area over and over again that you know the numbers like the back of your hand and then you can call yourself a real estate investor.
As do I!
- Your buy-box should consist of a specific geographic area, budget, and product type.
- Inside baseball of improving areas can be found online and social media.
- Get a mentor and team to have a second look to approve your deal also.