Finding great deals to invest in is the most difficult and most important part of real estate investing. Experienced real estate investors understand that they make their profit when they purchase the property, not when they sell it.
Each property has numerous characteristics that must be examined, and one specific issue with the property may end up being a deal breaker that forces the investor to keep searching. One overlooked detail about the property can turn a the predicted profit into a sizable loss.
Many real estate investors subscribe to the “100:10:3:1 rule” (or some variation of it):
- An investor must look at 100 properties to find 10 potential deals that can be profitable
- From these 10 potential deals an investor will submit offers on 3
- Of the 3 offers submitted, 1 will be accepted
Finding a suitable investment property opportunity is a very time-consuming process, but the effort is absolutely necessary to find the right property that will produce a solid return.
Lost Deals = Lost Profits
What if the investor doesn’t get the “1” and loses it to competition? Failure to secure the “1” deal after the immense amount of time and effort needed to find quality opportunities can be an enormous waste of an investor’s resources and major loss of potential profits.
Missing out on 3-4 good deals per year could cause the investor to lose out on $75,000-$500,000+ of profit per year. If the investor isn’t able to acquire the good deals they find, why waste the time of looking for them in the first place?
Don’t Get Sucked into a Bidding War
Simply offering the highest amount for the property is not the answer. Increasing the bid may improve the likelihood of having the seller accept the offer, but every additional dollar bid by the investor is a dollar that comes straight out of the investor’s profit. A bidding war will quickly take the potential project from profitable to a project that will just break even or worse.
How can the investor quickly secure the property without simply increasing the offer and paying more? The investor must set their offer apart from the competition by presenting an offer that results in the seller getting their money as quickly and easily as possible.
Offer with Cash
Offering all cash is an option that will grab the seller’s attention. No financing contingencies and an easier, quick close. But tying up a large portion of the investor’s capital in one property may prevent the investor from being able to act quickly on another opportunity around the corner.
If the property being purchased will be rehabbed, the investor must keep enough capital on hand for improvement costs and a reserve fund just in case. Whenever possible, it’s best to keep a sufficient amount of cash in the bank account.
Offer with Hard Money Financing
An offer with a hard money loan isn’t as strong as an offer with all cash, but it can be the next best thing. Hard money gives the investor the ability to close quickly and the flexibility to keep more cash on hard. Many hard money lenders are able to fund in 5-10 days and require a down payment of around 25%.
An experienced seller (or experienced seller’s agent) understands that hard money loans are funded much faster than conventional bank loans. A hard money lender is also less likely to find some little detail about the transaction at the last minute and back out of financing the deal (something banks are known to do occasionally).
Conclusion
While a full cash offer is often the best way to secure a property at a good price when there is competition, it’s a luxury few investors are able to bring to the table. And the consequences of missing out on future deals while the cash is tied up in the current project could also prove to be costly.
When a cash offer isn’t possible, or the investor wishes to keep enough funds on hand for another potential project, a hard money loan may be the best option for offering a quick close and setting themselves apart from the competition to secure their current “1” property.
North Coast Financial, Inc. is a hard money lender in San Diego, California with over 30 years of experience. For more information about our loan programs or to inquire about a loan please contact Don Hensel. don@northcoastfinancialinc.com
760-722-2991
FAQs
Many real estate investors subscribe to the “100:10:3:1 rule” (or some variation of it): An investor must look at 100 properties to find 10 potential deals that can be profitable. From these 10 potential deals an investor will submit offers on 3. Of the 3 offers submitted, 1 will be accepted.
What is the 100 3 1 rule? ›
The 100:10:3:1 rule simplified means looking at 100 properties out of those 100 properties 10 may be profitable for an investor. The investor will decide on 3 properties to put an offer in for purchase and out of those 3 offers only 1 will be accepted.
What is the 100 rule in real estate? ›
100 x Monthly Rent = Maximum Purchase Price
So, if you saw a property listed for $160,000, you would know you're getting closer to a good investment. Or if it was listed for $250,000, you wouldn't have to waste your time on it. But the one percent rule is not the final word on a property.
What is the 10 percent rule in investing? ›
In case, the monthly average continues to rise, the investor does not have to take any action - the profits may be allowed to run. However, a 10 percent fall in the monthly value of investments is considered a signal to sell and liquidate the portfolio fully, and sometimes partially.
What is the number 1 rule investing? ›
Rule 1: Never Lose Money
But, in fact, events can transpire that can cause an investor to forget this rule.
What is the rule of 100 in investing? ›
The rule suggests allocating 100 minus their age in stocks, with the remaining amount in bonds, to reduce risk and increase potential returns.
What is the 1 3 rule of money? ›
The judge of CNBC's "Money Court" tells CNBC Make It that renters and buyers alike need to follow the 1/3 rule, which calls for a third of your after-tax income to go toward living expenses, a third toward your home and the last third toward savings and investments.
What is the 100 10 3 1 rule? ›
Many real estate investors subscribe to the “100:10:3:1 rule” (or some variation of it): An investor must look at 100 properties to find 10 potential deals that can be profitable. From these 10 potential deals an investor will submit offers on 3. Of the 3 offers submitted, 1 will be accepted.
How important is the 1 rule in real estate investing? ›
You can also apply the 1 percent rule to gauge whether or not a property might be a good investment based on its historical rent. For instance, if a home is listed for $200,000 and the most recent tenants paid $1,500 per month, that's less than 1 percent — and, therefore, probably not an attractive investment.
Is the 1% rule in real estate realistic? ›
The 1% rule used to be a pretty good first metric to determine whether a property would likely make a good investment. With currently inflated home prices, the 1% rule no longer applies.
Section 12(d)(1) of the 1940 Act limits the amount an acquiring fund can invest in an acquired fund to 3% of the outstanding voting stock of the acquired fund, 5% of the value of the acquiring fund's total assets in any one other acquired fund, and 10% of the value of the acquiring fund's total assets in all other ...
What is the 80% rule investing? ›
Based on the application of famed economist Vilfredo Pareto's 80-20 rule, here are a few examples: 80% of your stock market portfolio's profits might come from 20% of your holdings. 80% of a company's revenues may derive from 20% of its clients. 20% of the world's population accounts for 80% of its wealth.
What is the 50% rule in investing? ›
The 50 Percent Rule is a shortcut that real estate investors can use to quickly predict the total operating expenses that a rental property investment is likely to generate. To work out a property's monthly operating expenses using the 50 rule, you simply multiply the property 's gross rent income by 50%.
What is 4 3 2 1 investment strategy? ›
The 4-3-2-1 Approach
One simple rule of thumb I tend to adopt is going by the 4-3-2-1 ratios to budgeting. This ratio allocates 40% of your income towards expenses, 30% towards housing, 20% towards savings and investments and 10% towards insurance.
What are the 4 golden rules investing? ›
They are: (1) Use specialist products; (2) Diversify manager research risk; (3) Diversify investment styles; and, (4) Rebalance to asset mix policy.
What is the 70% rule investing? ›
Basically, the rule says real estate investors should pay no more than 70% of a property's after-repair value (ARV) minus the cost of the repairs necessary to renovate the home. The ARV of a property is the amount a home could sell for after flippers renovate it.
What is the rule of 100 vs 120? ›
The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.
What is the 100 minus rule? ›
According to the '100 minus age' rule, an investor's portfolio should comprise 100 minus their age percentage of their surplus funds in equities and the remainder in debt.
How do you calculate the 1 rule? ›
Calculating the 1% rule is simple. Just multiply the purchase price of the property by 1%. Even easier, move the comma in the purchase price to the left two spaces. The result should be the minimum you charge in monthly rent.
