How to Find a Great Deal on a Property

How to Find a Great Deal on a Property

BiggerPockets CEO Scott Trench is a big believer in slow, “boring” investing — using tried and true ways to build wealth over a long period of time. 

When it comes to the stock market, that has meant simply putting money into index funds that track the broader market every month.

In terms of real-estate investing, that has meant buying properties the traditional way: putting down a 25% down payment and building up equity in the property over years by renting them out. Since buying his first property in 2014, Trench says he’s now built up a portfolio of 13 units across five properties.

While everyone’s individual financial situation is different, this is Trench’s recommended approach for many first-time real-estate investors. During a November 9 webinar, he laid out a plan of action for prospective investors to follow step-by-step.

Buying your first property

Before thinking about buying property, he said to save up the down payment money, make sure your credit score is above 700, and have a plan about how long you want to hold the property. He said it’s important to be in a strong enough financial position to hold the property over the long-term, so that it has time to appreciate.

Once these things are in order, he said to come up with a list of criteria for a property. His own checklist includes five things:

  • The property has between one and four units. This means the property will probably be in a fairly affordable range, and won’t be too much to manage.
  • The property’s location is good. In this respect, Trench refers to the property’s immediate surroundings. A good barometer for determining if a location is good is asking yourself if you personally would live there, Trench said.
  • The property can be easily improved. Trench said this means little things like painting or adding new flooring.
  • The property cash flows right away. A property shouldn’t immediately become a financial liability, Trench said, as it defeats the purpose of investing in real estate: to improve your life.
  • The property is likely to appreciate over the long-term. This can mean the economic and population trends in the state or city you’re looking to invest in are positive. In one instance for Trench, this meant not buying a property because it had a “gentleman’s club” next to it, which he believed would stop the property from appreciating in value.

Making sure a deal cash flows

Considering the above criteria, Trench said to make a “buy box,” or a specific outline of the exact type of property you’re looking for. The “buy box” should include specific neighborhoods you’re looking to buy in, and a specific price range you’re looking to buy in. To come up with a reasonable price estimate, he said to look at houses in your defined area that recently sold.

Then, to make sure a deal will cash flow, he listed a number of costs to factor into an analysis, including the cost of the mortgage payment (with interest factored in), property taxes, insurance, repairs, and vacancy costs. Other potential costs include HOA fees, water bills, garbage collection fees, and other miscellaneous bills a property might incur. Trench said to be conservative with each estimate to have a higher degree of certainty that a property will earn you money every month.

Those costs should then be subtracted from the expected monthly rent. 

He said running this analysis on a recently sold property would allow prospective investors to have an idea of what would make a good deal. In the video, Trench gave an example of a duplex that recently sold for $160,000 in Troy, New York that rents for $2,600 total a month.

A 25% down payment for the property would be $40,000, and he factored in assumed closing costs of $4,000, meaning $44,000 of cash would be needed upfront.

Monthly property taxes are $437, while insurance is $81. For repairs and maintenance, he estimated that it would be 5% of the monthly rent. He also set aside another 5% each month for future vacancies, and another 5% for repair needs that could pop up. For management fees (if applicable), he set aside 10% of the rent, and earmarked $55 a month for the water bill. He also set aside another $125 a month for lawn care and snow removal. 

After all of these expenses, the landlord would still pocket $390 a month, Trench said. 

With this analysis done, Trench said to broadcast to real-estate agents and groups what type of deal you’re looking for, and to wait for one to come onto the market. He also said to get in touch with a lender to get pre-approved for a mortgage.