Alright…you’re convinced that real estate is the best way to build a nest egg fast, create cash flow, invest for the long-term, and systematically increase your net worth. You’ve realized that almost everyone with a high net worth has done something with real estate, and it’s probably time that you got into it as well. You’re probably wondering what real estate investors look for in a property to make profits. After all, it’s the most basic foundation of the whole investing strategy.
So what are real estate investors look for to make profits? Actually, it depends on the type of investment strategy they’re interested in doing—if you can look for different things in a potential rental property than you are with a single family fix & flip.
So let’s start by talking about what fix & flip real estate investors look for.
Real Estate Investors Look For The Basics
Let’s start with this…what is the overall thought process behind finding a deal that can be flipped for profit?
You need to find a motivated seller
It might seem obvious that someone has to want to move before they’ll sell you their home, but it’s a bit more complicated in practice. I’ll talk in a minute about off-market deals and why I don’t care for the MLS when finding deals, but just know that it’s not always so obvious that someone is looking to move. You need to go find them.
Let’s say you own a second property. It’s one that you were letting a friend use for awhile, or your parents, or maybe you were renting it out.
They no longer are living there, and the house has fallen into disrepair! Perhaps you live too far away and it seems too inconvenient to fix it up, or it would be too expensive…or whatever the reason may be. Now, it’s just sitting there, vacant. The weeds are growing high, a window is broken, and it’s basically an eyesore.
At this point, it’s going to be next to impossible to find someone to buy the property to live in it. It looks terrible and no conventional bank would lend to someone to move into a house in that much need of repair.
Enter a real estate investor.
He comes with a cash offer and says he can take the house off your hands in the state that it’s in! Doesn’t that sound like a great deal for both parties? Absolutely.
That’s the name of the game—you’re trying to find people who are motivated to sell their house. In the next section, I’ll give you more examples of off-market deals with motivated sellers.
You need to buy properties at a discount
Yep…a discount. If you think you can fix up the house and sell it for $300,000, you’re going to need to buy it for much cheaper than that if you’re going to have enough money to fix it up and make a profit yourself.
I teach people to only pay 70% of the after repair value (ARV) on a house. On that $300,000 house, you don’t want to buy it for more than $210,000.
So if someone can fix it up and sell it for that much, why would they give it to you for a discount?
It’s because of what we already talked about: motivation. The seller is ready to move on from the property and will take a discount to do so. However, the seller needs to have equity in the property for it to work.
You need to find properties with equity.
Equity is the difference between how much someone owes on the property, and how much they could sell the property for. Let’s say that you have $250,000 left on your mortgage, but you could sell the property for $300,000. You’ve got $50,000 in equity.
Now…no matter how motivated your seller is, it’s highly unlikely they’re going to take any offer that’s lower than what they owe on the property. In that example above, if I offered you $210,000 for your property, you’d still be on the hook for $40,000 to the bank…and you wouldn’t even have the property!
That’s why I try to look for properties with at least $100,000 in equity. That way the seller still has some wiggle room to go down in price and still walk away with some money in their pocket. There are lots of ways to find properties that have equity. I wrote a post all about that here.
Real Estate Investors Look For Off-Market Deals
The most common idea that I stress to my students and borrowers over and over again is that they have to be looking for off-market deals! Anything that’s on the MLS is going to have too much competition. Plus, if it’s on the MLS, it usually means the property is going to be more fixed up and at least pass FHA guidelines—meaning a borrower can get a conventional 30-year mortgage on it. They’re not going to sell it at a huge discount.
Exception to the Rule
Before I go further, I will tell you (against my better judgement) how you can make the MLS work for you.
Be the whale
This means that you call every single real estate agent in the area. Like hundreds and hundreds of them. You tell them that you will be willing to buy any property where they can get a price for 70% of the ARV. You tell them not to even call you otherwise. If they find that property, they can be your buyer’s agent and then your seller’s agent when the flip is over. Very, very few real estate agents will take you up on this (like maybe 1%), so you have to call a bunch.
Network with investment-minded real estate agents
There are agents out there that toe the line between investors and real estate agents. I was one of them. My wife and I got started in real estate as agents. We actually had a really good thing going:
We learned how to find potential investment properties, ones that would be good for fix & flips. Then, we’d go offer that deal to our network of fix & flippers! They were beyond overjoyed to have someone basically hand them properties with $40k profit potential!
And we did okay as well, being their agent. We basically kept ourselves busy with new business that we found.
You can find agents like I was. Go to networking events, go online, ask around, ask agents if they’ve done any investing, etc.
(The end of the story: one day my wife found a great deal. I asked her who she had in mind to flip the house…and she said us. I WAS TERRIFIED. And now I’ve done over 500+ flips. Wives are the best)
Okay…back to off-market deals.
Like I said above, you’re going to look for sellers going through a change (motivation!) and have equity. Often, these people think they might sell but aren’t sure, or they may not have a clue they’re ready to sell and you approach them with an offer.
So what are real estate investors looking for when it comes to finding deals for fix & flips?
Inherit a Property
Let’s say an older gentleman dies and he leaves his house to his four children. They all fly in to attend the funeral, figure out inheritance, and take care of his belongings and property. In a situation like this, it usually makes sense to sell the property and then split up the profit four ways among the children—especially if they all live out of town.
But they have a few problems. They want to sell the property fast. This isn’t something they want to drag out. They’re in town now, and would like to at least have a good head start on the process.
But then picture this…
Their father had been living there for 40 years and the house is badly in need of repairs. I see this all the time. Perhaps the foundation is cracking and the roof is leaking. Maybe several other things need to be updated. These four kids don’t want to take the time to fix this all up, making them prime candidates to sell you the property.
Important note: You’re not here taking advantage of a situation. These people have a genuine need and you have a fantastic solution because you’re willing to put in the time to fix it up. I always like to explain to them that I’m a real estate investor and I’m looking to make about 10% of the property’s value as my portion, and tell them how much I can pay them to make it work out for both parties.
Landlords (Especially Out-of-State)
This is a great story, so forgive me if you’ve heard me tell it before.
My mother owned a property that she rented out. After a few years, she got really tired of it. Tired of bad tenants, tired of calls to fix stuff, tired of evictions.
So one day, a postcard comes in the mail from an investor that said he’d pay cash for her property…and she sold it to him!
I’m like MOM, that’s LITERALLY what I do for a living! I’ll fix it up and help you make a nice profit…and she said no, because she was SO done with it that she just wanted to get it off her hands. Talk about betrayal, right?
Targeting landlords are an amazing source of leads for me. If they live out of state, that’s an even bigger headache trying to maintain a property. They probably have a nephew or a friend who aren’t managing it very well, or they’re paying too much to a property management company. These are prime off-market deals that real estate investors are looking for.
I actually recently had a student named Lauren. This was her favorite strategy. She specifically shared with us a deal where she found an older lady who’d grown tired of the expense & time required for being a landlord. She paid ZERO dollars cash-to-close and pocketed $48,000!
Here’s her story.
Moving into Retirement Home or With Family
Several years ago, I found an older lady who’s husband had passed away. She owned her house free and clear, but was getting too old to take care of it herself.
She decided it was time to move in with family. I found her and helped her get a nice paycheck without having to worry about repairs. She got her money fast, and I got a property to make a decent chunk of change on! Once again, it was most certainly a win/win.
Remember, you’re looking for people going through a change. A similar version of this strategy is when older people need to move into a retirement home, and especially need money fast because those places are expensive.
Probate Lawyers, REO Agents, Contractors, Divorce Attorneys, Mortgage Brokers, Bankruptcy Attorneys, Funeral Planners, and More!
These are all people who work with others who are going through a life change, and there’s often a property in the mix. This requires you to build up a network and maintain it, but I’ve had people send me 5, 10, and even 20 deals!
It’s easy for them. All they have to do is say something like “Do you have a plan for what to do with the house? I can put you in touch with someone who can help.”
If you get the deal, you pay them a $500 finder’s fee. Easy as can be, and everyone does well in the situation.
Want to read more about off-market deals? I’ve put together an in-depth post with my 26 favorite strategies!
Real Estate Investors Look For Profitability
Well, duh, right? It’s obvious…but the majority of would-be investors DON’T do enough research on potential profit. It’s the #1 reason why deals go south.
As a hard money lender, assessing risk on a deal and validating values is literally what we do…so let me pull back the curtain so you can see how an actual money lender figures profitability!
Estimate Rehab Costs
This can be tricky, and definitely gets better with experience. At first, you may want to use the $15-$30 rule. If the property doesn’t need a ton of repairs, lean on the side of $15 per square foot for the rehab. If you’re looking at a complete gut, err closer to $30 per square foot.
Another solution is to bring a contractor along with you. Maybe you have a friend who can partner with you on the deal, or you can bring the contractor along who’s going to do the project for you. Perhaps he can get a percent of the profit to walk through multiple deals with you.
After you’ve done some of these, you’ll be like me. I can walk through a property and in a few minutes have a very strong idea what I need to rehab and what the cost will be.
One tip I’ll give you about rehabbing the property…resist the urge to make it too nice! It might sound counterintuitive, but there’s something known as “overbuilding” the neighborhood. If every house is valued around $300k, it’s going to be nearly impossible to sell yours for $400k, even if yours is considerably nicer. It’s just how these things work.
A funny side note on that…You know Chip and Joanna Gaines? The houses that they remodel are often really hard to sell! It’s for that reason above…if the home is much nicer than everything else around it, you’re just not going to be able to ask for much more.
With my rehabs, I build everything up to a comparable level of what I’m seeing in the neighborhood…if they’ve got laminate floors, I’ll do laminate floors. If they’ve got granite counters, I’ll do granite counters. With one exception—I like to do one thing slightly upgraded over the neighbors so I can get a leg up if someone else is selling at the same time.
Find Comparable Properties
First, you’re going to try to estimate the After Repair Value of the property. How much should you be able to sell it for?
You want to find three comparable properties (comps) within 1/2 to 1 mile of your property that have been recently sold. They need to be as close as possible to what your property is going to be after you fix it up. If yours only has 2 bedrooms now, but it will have 3, find comps with 3 bedrooms. You want to look for recently sold properties as well as ones that are on the market. (You can use Zillow or Realtor to try to find ones, but I have a proprietary tool inside my Find-Fund-Flip System that makes this step a breeze).
If you can’t find three, you may need to estimate a little, but be as accurate and realistic as possible. If the closest comp is going to be 400 square feet smaller, calculate the difference using a cost per square foot measurement. If at all possible, don’t use comps with different quantities of beds or bathrooms, because that can throw your calculations off fast.
Check for “Deal Killers”
There are a few things you can find wrong with a potential deal that you should make you walk away from the deal entirely. Here are a few:
- Foundational Issues
- Roof issues
- Structural problems
My rule of thumb is that if I’m 100% confident I can fix these issues for less than $5k, then I may move forward with it. Otherwise, it’s not worth it. Each of those issues can end up being more of a pain and much more expensive than you think it’s going to be on first look.
For example, maybe you think you’ve got a small, isolated incident of mold. You buy the property, only to find that when you tear into the walls in other rooms you find mold there as well.
Location, Location, Location
When determining profitability of a deal, you as the investor must take into account the location!
If you can’t find any comparable properties, then you’ll have a tough time figuring out whether the deal will be worth it.
Also, as a hard money lender, my underwriting team has a few set rules about location that affect how much we’ll be willing to lend on a deal. Even if your funding source will still lend you the money, just know that the property will harder to sell if any of these are present:
- Crime – if I would let my wife walk down the street at night, then I’ll do a deal there.
- Boarded up windows – obviously looks bad, lowers the value of the houses around it, and may indicate a less desirable area to live.
- High rental area – if most of the properties there are rentals, that can lower the desirability for someone looking for a more stable neighborhood to move into with their family. This can cost you money when trying to sell your deal.
- Next to a major road – I recently had a potential borrower bring us a potential deal for us to evaluate. It looked like a really nice property! Didn’t need too much rehab work and had a little land around it. Only problem was that literally 10 feet from the front door was a street with a 45 MPH limit! NO WAY would I ever do that deal! You can’t compare that property to any comps around it, because just being that close to the street is going to cut down the value of the house SIGNIFICANTLY. I would never live in that house, and 95% of people coming to look would walk away as soon as they saw the road it was on. That could easily lower the value by $50k, taking all your profit (and some!) with it.
- Next to undesirable areas – I had a funny experience back in the day…I once bought a property that was three houses away from a Burger King! I didn’t think it was so bad until I was there at night and I thought the Burger King sign was going to give me a sunburn… needless to say, I regretted that deal!
Real Estate Investors Look at Overall Market Volatility
As a real estate investor, I don’t really care what the market is doing as long as there is movement! The only market that a real estate investor can’t really do deals in is a dead market, where neither buyers or sellers are doing much.
So why don’t I care if it’s a buyers market or a sellers market?
Think about it like this:
If it’s a buyers market, I might have an easier time finding and purchasing the deal, but then a tougher time selling the property.
If it’s a sellers market, I’ll have a harder time finding deals, but an easier time selling it.
They each have their own challenges and require a slightly different strategy, but it’s really not much different. There’s no “perfect” market. You just want movement.
What About Real Estate Investors Looking For Rental Properties?
I’ve talked so far about what do real estate investors look for in a fix & flip property, so let’s cover briefly what they look for when in a potential rental property:
- What will the open spaces next to the property be in the future? I had a friend, a real estate agent, trying to help a client sell a high-end house. After the client had moved in, a bunch of low-quality town-homes had been built practically in his backyard. This lowered the value significantly and made his home harder to sell. If you want to have a property to rent out for years and years, learn what those nearby open spaces are going to be.
- How close to the city, or business centers, is it? A great place for rental properties is not too close to the busy city, but somewhere with a quick, straight shot there. For example, a nice suburb with an easy, twenty-minute drive into the city is a great location, and you’ll never run out of potential renters.
- Are the schools high quality? With a fix & flip, you only need one buyer. With rentals, you may be cycling through tenants every year or two. Having good schools nearby makes attracting tenants regularly that much easier.
- What types of properties are nearby? If there are lots of town-homes or condos nearby, perhaps you should rent out your single family home to four single roommates.
- Also all the “Deal Killers” I mentioned above, as well as the other location factors—such as crime, busy roads, boarded windows, and undesirable businesses—of course play into your rental property success in the future.
I hope this article has helped you see what real estate investors look for when looking for fix & flips and rental properties!