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? ›
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 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.
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 number 1 rule of investing? ›
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. And that's all the rules there are.”
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? ›
A standard rule of thumb for startup selection processes in Latin America is 100/10/1. Out of every 100 startups reviewed, 10 are selected for further evaluation and 1 receives financing. These ratios can be observed across the capital stack – from accelerator programs to later stage venture capital funds.
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.
Can I lose more money than I invest? ›
The biggest risk from buying on margin is that you can lose much more money than you initially invested. A decline of 50 percent or more from stocks that were half-funded using borrowed funds, equates to a loss of 100 percent or more in your portfolio, plus interest and commissions.
What is the Buffett rule of investing? ›
“The first rule of investment is don't lose. The second rule of investment is don't forget the first rule.” Buffett famously said the above in a television interview.
The 7% stop loss rule is a rule of thumb to place a stop loss order at about 7% or 8% below the buy order for any new position. If the asset price falls by more than 7%, the stop-loss order automatically executes and liquidates the traders' position.
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.
What does Warren Buffett mean by don't lose money? ›
It highlights his fundamental investment philosophy with both wit and clarity. Buffett's investment strategy stands out because of his aversion to losses. Instead of accepting losses, he tends to double down on his positions or even increase his investments when they go against him.
Did Warren Buffett lose money in 2008? ›
Rule 2: Never Forget Rule No. 1. Buffett personally lost about $25 billion in the financial crisis of 2008 and his company, Berkshire Hathaway, lost its revered AAA rating.
Does Warren Buffett buy and hold? ›
Warren Buffett is known as a buy-and-hold investor. He once stated, "When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever." However, Buffett doesn't hold forever every stock he buys.
What is the 10 3 1 rule 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.
What is the 10 5 3 rule of investment? ›
1. 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? ›
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 rule of 10 3 2 1 0? ›
Cut out caffeine 10 hours before bed. Don't eat or drink alcohol 3 hours before bed. Stop working 2 hours before bed. Get away from your screens 2 hours before bed.
