Welcome back to part three of the series. The first part of the series covered real estate cycles and my personal experience with them. Last week, we deliberated over real estate strategies and goals.
Now that we have established the real estate basics and how to pick a strategy – let’s jump into finding real estate deals. If you are behind, please check out the previous posts below to learn about real estate investing.
Part I, Understanding Real Estate Cycles, covered:
- Understanding real estate cycles
- How long real estate cycles last
- Phases of real estate cycles
- My experience with real estate cycles
Part II, Selecting a Real Estate Strategy, covered:
- Real Estate Strategies
- Setting your real estate goals
- Aligning your real e estate strategy with your goals
- Specializing in real estate investing
Part III, Finding deals, covers Finding deals:
- My approach to finding real estate deals
- Creating your criteria
- Create deal funnels
- Analyze Daily
How to Find Real Estate Deals
I want to share with you my approach to finding great real estate deals. As we previously discussed, there are always deals regardless of where we are in the real estate cycle. I take three simple steps when I am looking for a new property. My systematic approach has allowed me to find the best real estate deals. I know this method will provide great guidance for many of you reading this.
How I find deals
When I am in ‘deal mode’ or looking for a new deal – I’m like a machine and approach finding real estate deals like clockwork. My repetitive approach has served me well and may work for others. This post will teach you how to source real estate deals.
My three step process to finding real estate deals:
- Create search criteria
- Create deal funnels
- Analyze daily
1. Create Search Criteria
Creating search criteria is the first step. That’s right, creating search criteria is my first move when I want to find a new deal.
The search criteria should fit an investor’s real estate strategy, be realistic, and specific. Having specific search criteria helps me sift through listings and provides clear guidance of what I want. Likewise, this will help you screen deals.
Creating your search criteria is paramount; you cannot find what you are looking for if you do not know what you seek. I highly recommend you do not skip this step. Make sure your search criteria matches your real estate strategy. And make sure your search criteria is reasonable. Don’t chase unicorns.
Are you looking for a long-term, buy and hold, rental property that will provide consistent cash flow?
Are you looking for a property that you can fix-n-flip?
Or maybe you are looking for a property that you can wholesale to another investor?
Do you want a turnkey property that requires little or no work?
All of these are great strategies that can yield great results for investors. However, each of these strategies requires a certain type of property.
The perfect property for the flix-n-flip investor would not be appealing for a turnkey investor. Likewise, a turnkey property may not be attractive for a wholesaler. Some properties may work for multiple strategies. Most properties will only work for one or a few strategies. No property will work for all real estate strategies.
Don’t waste your time with bad deals or properties that don’t fit your needs. This is why you must have a real estate strategy, know what you are looking for, and have specific search criteria.
Take a moment and figure out your search criteria.
Asl yourself what are you looking for in real estate? Your search criteria and real estate strategy should be aligned.
For example, If you are looking to flip a property make sure you are buying the property well below after repair value (ARV). A good rule of thumb is 70% of ARV.
Likewise, I am a long-term investor. I like to buy and hold my properties for cash flow. More specifically, I like single family homes or 2-4 unit buildings. I prefer properties that require some renovations so that I can create additional value. More importantly, I care about cash flow. The property’s rental income will need to cover all repairs, maintenance, taxes, insurance, and the monthly mortgage. Additionally, there needs to be money left over for me to put into my pocket every month.
Based on my previous statement, I am probably not interested in single family homes located in the best neighborhoods. At least, not in DC. Homes in the more expensive neighborhoods sell for well over $1 million. The rent for the same home would be well below the one percent rule and not even cover the mortgage.
It doesn’t matter what real estate strategy you use. Just make sure your search criteria fits your goals and strategy
2. Create Deal Funnels
Step two – create deal funnels. I create as many deal funnels as possible. Creating deal funnels is essential to being efficient. These funnels bring me deals which saves me time. . Three of the deal funnels I use are the MLS, Redfin, and my real estate network.
Multiple Listing Service (MLS)
First, I relay my search criteria to my real estate agent. My agent then creates a daily (or instantaneous) report on the Multiple Listing Service (MLS) based on the information provided. The MLS is where most every property is listed for sale.
Your real estate agent should have access to the MLS. Inform your real estate agent what you are looking for. A good real estate agent will be able to generate an automated report for you. Be sure to find a real estate agent that’s an experienced real estate investor. Even better, find one that has experience with your real estate strategy
Second, I love the Redfin app. Like my approach to the MLS, I set up my own searches through the free app/website. The interface is easy to navigate and Redfin allows you to create multiple ‘saved searches’ based on different search criteria.
Based on my search criteria, I get instant notifications sent to my phone any time a new deal is listed that fits my criteria. This is very important. In a hot market, real estate deals move quickly and timing is essential. Jumping on a deal is a must – especially in a hot market. If you wait a couple of days, someone may snatch up the property.
Real Estate Network
Third, I reach out to my real estate network. I let my real estate connections know I am on the prowl for another deal. This list may include brokers, property managers, real estate agents, contractors, and lenders. Attorneys and CPAs can also provide a good source for deals; both of these specialists see plenty of off-market deals. The more people that know what you are looking for the better.
Build a real estate network if you do not already have one. I recommend going to local real estate meetups. Find other investors in your area and schedule as many coffees or lunches as possible.
3. Analyze Daily
While on the warpath searching for a new property, you must look analyze deals daily. This is how to find incredible real estate deals. Every morning, while I sip coffee, I spend at least 30 minutes to an hour looking at new listings. If you snooze, you lose. Good real estate deals move quickly, especially in a hot market.
Analyzing real estate deals should become a habit. Likewise, you need to make analyzing deals second nature. You need to develop the ability to confidently and efficiently analyze a deal. Over time, your skills will improve and you will develop a knack for spotting good real estate deals.
Some important factors to remember when analyzing deals:
- Vacancy – don’t forget to factor in future vacancies
- Reserves – real estate is a physical asset that requires upkeep. Make sure factor in a reserve budget for future repairs. Over a 30 year period, everything will need to be replaced.
- Repairs – things break. There are no two ways about it. Don’t forget to account for future repairs.
- Real Estate Taxes – you must pay them. Check the local government website for property tax rates.
- Insurance – don’t be foolish, pay for insurance.
- Rent assumptions – what are you basing your rental assumptions on? Check rental websites, craigslist, and with other investors for rent comps. Make sure you rents are not below the market rate. Likewise, you don’t want to get blindsided and realize your assumptions are well above the current market rental rate.
- Renovation Budget – get multiple bids from contractors. Make sure your renovation budget is reasonable.
- Contingency – Building in a buffer or contingency into your renovation budget. I would recommend 5-10% of the total budget. So if you have a $50k renovation. You should have up to $5k for cost overruns.
I hope these three simple steps will sever you well. These exact steps enabled me to buy 4 properties in 4 years. I was able to go from being in debt to a net worth over $650k in 5 years. My success was largely driven by real estate and I know you can have similar success. Now go out there and find great real estate deals.