After several years of explosive home price growth, followed by mortgage rates nearly doubling in a few months, it feels like a terrible time to buy investment properties. Real estate prices are just too high, and high interest rates deepen the cash flow problem.
But following the herd and conventional wisdom never got real estate investors anywhere.
Experienced investors know that it takes work to find good deals. Often, you have to go out and create your own deals. As you adapt to today’s housing market, try these tactics to score great deals on investment properties.
It worked 20 years ago, and it works today. Distressed property owners — both homeowners and investors alike — are as motivated as sellers get, with the clock ticking down on the loss of their property.
Foreclosure activity in the U.S. had declined for a decade before turning about-face in 2022. In fact, over the last year, foreclosure starts have skyrocketed 187 percent. That creates an opportunity for enterprising investors.
Once upon a time, you had to pull public records from the courthouse to get a list of upcoming foreclosures. Today, you can subscribe to services like Foreclosure.com or Propstream for instant access to all local foreclosures.
But that raises its own challenges. Property owners in foreclosure get flooded with letters, and sometimes even phone calls, texts, emails and social media messages from would-be buyers and bankruptcy attorneys. That means that if you want a shot at working with them, you need to find a way to stand out.
Consider offering to let homeowners stay in their homes, with the opportunity to buy the property back from you. Most homeowners don’t want to move, or else they would have sold their property for full value before coming to this point. Find a way to let them do it, but just beware that you’re signing a lease with a financially unstable tenant.
The same principle applies to property owners in tax sale. If they’ve fallen behind on their property taxes, and risk either losing their home to tax sale or having a tax lien put on it, they’re likely more open to a low but fast-closing offer.
If you’re not familiar with the process of buying tax liens or buying properties at tax sale, read up on how to score bargains on tax sales.
A “bird dog” is a person who alerts you to potentially good deals. In exchange for a finder’s fee, of course.
Start building a network in your target neighborhoods, including postal workers, bartenders, baristas, and local busybodies. Make it clear that you’ll pay good money for tips that pan out, about owners looking to sell fast.
Explain that you can pay in cash (or close enough to it), and that you can settle within a week. Granted, that requires you to actually be able to deliver on that — a prerequisite for buying from urgent, off-market sellers anyway. Create relationships with several lenders who can deliver fast investment property loans, and title companies who can close in record time.
If you hate networking, you’re in the wrong line of work. Get networking in the real estate industry, or look into alternative ways to invest such as crowdfunding.
Finding motivated sellers isn’t the only way to score deals in real estate, although it certainly offers the greatest potential discounts.
Alternatively, find a few real estate wholesalers who flip contracts to investors like you. They take a cut, but in theory they still leave some “meat on the bone” of equity.
These properties tend to be fixer-uppers, requiring renovation. Whether you plan on flipping the property or refinancing it to hold as a rental, just make sure you run the numbers conservatively.
On the one hand, turnkey properties don’t sell at much of a discount. But they make it far easier to buy long-distance, allowing you to buy rental properties in far more profitable markets than where you live.
You can find turnkey sellers on Facebook groups, on platforms like BiggerPockets, or properties listed directly on Roofstock. Again, be conservative when you run the cash flow numbers, with higher repair, maintenance and vacancy rate costs than you expect.
Despite what many investors will tell you, it is still possible to find good deals on the MLS. It just takes dozens of rejected lowball offers for every seller who doesn’t tell you off.
Look for properties that have sat unmoving on the market for at least 60 days, or for those with few photos. These sellers tend to be more amenable to low offers, if you can convince them that you’ll settle quickly.
While you’re at it, consider asking about a seller note. Most sellers aren’t familiar with owner financing, so it sometimes takes some explaining. But amenable sellers can help cover your down payment or even your entire mortgage, often at modest interest rates and no points or fees.
Don’t be afraid to get creative as a real estate investor.
One way to do that is to move into prospective investment properties. That could mean doing a live-in flip, where you use owner-occupied financing to buy the property and cover repair costs. You can then make them yourself at your own leisure, and sell the property once you’ve completed them.
Alternatively, you can house hack to start buying rentals with owner-occupied financing. You buy a multifamily property such as a duplex to live on one side and rent out the rest, and the rent from the other unit covers your mortgage payment. You can even use the future rents to help you qualify for the mortgage. After a year, you can move out and keep the property as a rental — all with homeowner financing instead of an expensive investment property loan.
In real estate investing as with everything else in life, you get what you put into it. The best deals take the most work to create, such as reaching out to hundreds of homeowners in foreclosure to try and buy one or two properties.
On the other end of the spectrum, you can hop on Roofstock and browse properties, making an offer on any you like. Far less work, but don’t expect a deep discount.
Decide what your priorities are as a real estate investor. Do you want to create a well-oiled machine of a business, cranking out hundreds of outreach letters, emails and text messages to find off-market sellers? Or do you want to invest more passively?
There’s no right or wrong answer, but you do need a strategy. Choose the strategy that fits your needs and learn everything you can about executing it well.
G. Brian Davis is a real estate geek and co-founder of Spark Rental.
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