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 does don't invest more than you can afford to lose mean? ›
By investing only money that you can afford to lose, you can stay focused on your long-term goals and avoid making decisions based on short-term fluctuations. Finally, investing only what you can afford to lose allows you to enjoy the potential benefits of investing without putting your financial stability at risk.
Can you lose your money investing? ›
Technically, yes. You can lose all your money in stocks or any other investment that has some degree of risk. However, this is rare. Even if you only hold one stock that does very poorly, you'll usually retain some residual value.
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 was born from this research. In data quality, the cost of verifying a record as it is entered is $1 per record. The cost of remediation to fix errors after they are created is $10 per record. The cost of inaction is $100 per record per year.
What is Warren Buffett's golden rule? ›
"Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1."- Warren Buffet.
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% investor rule? ›
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.
Buffett's first rule, "Never lose money," highlights the principle of capital preservation. He believes protecting your capital should be a primary focus because losing a substantial portion of your investment can significantly hinder your ability to generate long-term returns.
What is the number one rule of investing don't lose money? ›
"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. And that's all the rules there are." This quote from legendary billionaire investor Warren Buffett has become one of his most well-known aphorisms.
Why do I lose money when I invest? ›
Ultimately, many people lose money in the stock market because they simply can't wait long enough for meaningful profits to arrive. History shows that the longer you remain invested (in diversified stocks) the less chance you have of losing money in the stock market.
Has a stock ever come back from $0? ›
Can a stock ever rebound after it has gone to zero? Yes, but unlikely. A more typical example is the corporate shell gets zeroed and a new company is vended [sold] into the shell (the legal entity that remains after the bankruptcy) and the company begins trading again.
Do 90% of investors lose money? ›
It's a shocking statistic — approximately 90% of retail investors lose money in the stock market over the long run. With the rise of commission-free trading apps like Robinhood, more people than ever are trying their hand at stock picking.
Why do 90% of people lose money in the stock market? ›
One of the reasons for the loss in the stock market is that people do not decide the amount of their investment. This is also a big mistake. Because the investment amount is not fixed, they invest most of their money in the stock market. Due to which they do not have enough money even for emergency times.
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? ›
Understanding the 10-5-3 Rule
The 10-5-3 rule is a simple rule of thumb in the world of investment that suggests average annual returns on different asset classes: stocks, bonds, and cash. According to this rule, stocks can potentially return 10% annually, bonds 5%, and cash 3%.
What is the rule of 100 in investing? ›
The rule says that you subtract your age from 100 to arrive at the ideal asset allocation for your investments. So, if you are 30, then 100-30 would give 70, which is the percentage of equity you can have in your portfolio. That is, you have Equity:Debt in 70:30 ratio.
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.
