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 10 3 1 rule? ›
What is the 100 to 10 to 3 to 1 real estate rule? The 100 to 10 to 3 to 1 rule is a guideline for real estate investors that suggests a property's monthly rent should be at least 1% of its total purchase price.
What is the 1% rule for investors? ›
For a potential investment to pass the 1% rule, its monthly rent must equal at least 1% of the purchase price. If you want to buy an investment property, the 1% rule can be a helpful tool for finding the right property to achieve your investment goals.
What is the 50% rule in investing? ›
The 50% rule in real estate says that investors should expect a property's operating expenses to be roughly 50% of its gross income. This is useful for estimating potential cash flow from a rental property, but it's not always foolproof.
What is the 10 percent investment rule? ›
The 10% rule is a savings tip that suggests you set aside 10% of your gross monthly income for retirement or emergencies. If you still need to start a savings account, this is a great way to build up your savings. You should create a monthly budget before starting your savings journey.
What is the 10-3-1 formula? ›
10-3-1 RULE This is a Sales formula suggesting that out of 10 prospects you can get 3 appointments and out those 3 appointments you can make 1 sale. The rule is not as neat and there qualifications to it. This rule applies to anyone who sells something including those selling their labour for a wage.
What is the 100 10 1 rule? ›
The 1-10-100 Rule is a concept that highlights the importance of addressing problems at different stages of business operations. It suggests that addressing an issue at the initial stage (1) costs $1, at the escalation stage (10) costs $10, and at the crisis stage (100) costs $100.
What is Warren Buffett's golden rule? ›
Warren Buffett once said, “The first rule of an investment is don't lose [money]. And the second rule of an investment is don't forget the first rule.
What are Warren Buffett's 5 rules of investing? ›
A: Five rules drawn from Warren Buffett's wisdom for potentially building wealth include investing for the long term, staying informed, maintaining a competitive advantage, focusing on quality, and managing risk.
What is the 70 rule for investors? ›
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.
According to Standard and Poor's, the average annualized return of the S&P index, which later became the S&P 500, from 1926 to 2020 was 10%. 1 At 10%, you could double your initial investment every seven years (72 divided by 10).
What is the 120 rule in investing? ›
The Rule of 120 (previously known as the Rule of 100) says that subtracting your age from 120 will give you an idea of the weight percentage for equities in your portfolio.
What is the 90 10 rule in investing? ›
The rule stipulates investing 90% of one's investment capital toward low-cost stock-based index funds and the remainder 10% to short-term government bonds. The strategy comes from Buffett stating that upon his death, his wife's trust would be allocated in this method.
What is the 50 40 10 rule in investing? ›
The 50/40/10 rule budget is a simple way to budget that doesn't involve detailed budgeting categories. Instead, you spend 50% of your after-tax pay on needs, 40% on wants, and 10% on savings or paying off debt.
What is the 7/10 rule in investing? ›
The 7/10 rule in investing is a straightforward method to calculate the fair value of a company's stock. The rule states that a company's stock price should either be seven times its earnings before interest, taxes, depreciation, and amortization (EBITDA) or 10 times its operating earnings per share.
What is the 80-20 rule investment portfolio? ›
In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.
What is the 10-3-1 rule in sales? ›
Ten-three-one. It takes 10 leads (suspects) to generate three prospects (who participate in full fact finding), and one of them will become a client. That's the essence of the 10-3-1 ratio made famous by Al Granum, CLU, who passed away last week at the age of 91.
What is the 10 5 3 rule of investment? ›
According to this rule, stocks can potentially return 10% annually, bonds 5%, and cash 3%. While these figures are not guarantees, they serve as a guideline for investors to forecast potential returns and adjust their portfolio accordingly.
What is the rule of 100 in investing? ›
Determining the allocation of assets is a pivotal choice for investors, and a widely used initial guideline by many advisors is the “100 minus age" rule. This principle recommends investing the result of subtracting your age from 100 in equities, with the remaining portion allocated to debt instruments.
What is the 10-3-1 ratio in sales? ›
10-3-1 is a strict formula. It means, starting with 10 qualified prospects (People you know have a need, appreciate it and can buy) can lead to 3 booked appointments. Those booked appointments will result in the acquisition of one “policy” , but over time, not immediately.
