OLD
The Common Approach
Find a property. Look at the seller's price. Get excited about the house. Then start changing assumptions until the deal appears to work.
Section 8 • Lesson 6
Do not find the house first. Find the numbers first.
One of the easiest mistakes a new investor can make is falling in love with a property before knowing whether the investment works.
Street Smart investing starts with the rent, expenses, cash-flow target and financing assumptions. Then you determine the maximum offer price and search for properties that fit your number.
Determine the number first. Then hunt for the property.
Change the Order
Most people start with the property. SSBS starts with the economics.
SSBS
The Street Smart Approach
Determine realistic rent. Estimate expenses. Set required cash flow. Determine financing. Calculate your maximum offer. Then find properties that fit the economics.
The property does not create the deal. The numbers create the deal.
A beautiful house
at the wrong price
can still be a bad investment.
Step 1
Choose the market before choosing the house.
Start by identifying where you want to operate and what type of rental property you are trying to acquire.
City / Metro
Determine the market
in which you want to invest.
ZIP Code
Research the specific ZIP codes
relevant to the housing market
and voucher program.
Property Type
Determine whether you are targeting
single-family,
duplex,
small multifamily
or another property type.
Bedroom Count
Match the property type
to the rent data
you are researching.
Step 2
Determine a realistic monthly rent assumption.
Before searching for houses, establish what the property may reasonably be able to generate.
PHA
PHA Research
Identify the applicable housing authority and research its current voucher payment-standard information.
ZIP
SAFMR / ZIP Research
Where applicable, evaluate the relevant ZIP-code and bedroom-level rent information.
RENT
Expected Rent to Owner
Establish a conservative and realistic rent assumption for preliminary underwriting.
Do not treat a published payment standard as guaranteed rent.
Use it as part of your research
and verify actual program requirements,
property eligibility
and rent approval
with the applicable housing authority.
Step 3
Estimate the operating expenses before you shop.
A rent number by itself tells you almost nothing about profitability.
Vacancy
Include an allowance
for turnover
or collection issues.
Management
Include management costs
even if you initially
intend to self-manage.
Repairs
Set aside money
for ordinary maintenance
and repair.
CapEx
Reserve for roofs,
HVAC,
appliances
and larger replacements.
Taxes
Research actual
or projected property taxes.
Insurance
Obtain realistic
landlord insurance assumptions.
Utilities
Determine what expenses
may remain the owner's responsibility.
Other Costs
HOA,
lawn,
admin
and other recurring costs matter.
Step 4 — Before You Search
Calculate your Maximum Offer Price.
Once you have a rent assumption and reasonable expense assumptions, determine the acquisition price your model can support.
Enter the expected rent, operating expenses, target cash flow, financing assumptions, rehabilitation, closing, holding and contingency costs.
The calculator works backward and gives you the maximum modeled amount you can offer.
Reverse-Engineer Before You Search
Monthly Rent
Start with realistic income.
− Operating Expenses
Determine NOI.
− Target Cash Flow
Determine debt-service capacity.
→ Financing
Determine the supported loan amount.
− Acquisition Costs
Rehab, closing, holding and contingency.
Maximum Offer Price
Step 5
Now start searching for properties.
Once you know the maximum price your investment model supports, your property search becomes much more focused.
1
Search Under Your Maximum Price
Look for properties
at or below the number
supported by your analysis.
2
Match the Bedroom Count
Search for the bedroom configuration
that matches the rent research
you performed.
3
Stay Inside the Target Area
Do not assume neighboring ZIP codes
have the same rental economics.
4
Estimate Rehab Immediately
If the property requires repairs,
include them before deciding
what you can offer.
5
Re-run the Calculator
Replace preliminary assumptions
with property-specific numbers
as you learn more.
Where Can You Look?
Use multiple sources to build the property pipeline.
MLS / Broker
Licensed real-estate professionals
can provide listed-property
and comparable-sales information.
Public Listing Sites
Use consumer real-estate websites
to identify potential inventory
and track asking prices.
Wholesalers
Evaluate off-market opportunities
using the same underwriting standards
as listed properties.
Auctions
Understand title,
condition,
access,
financing
and due-diligence limitations
before bidding.
Direct-to-Owner
Some investors identify owners
directly
and negotiate without a traditional listing.
Local Relationships
Property managers,
contractors,
brokers
and other local professionals
may help identify opportunities.
The source of the property does not change the math.
Listed,
off-market,
auction,
wholesale
or direct-to-owner —
every property still has to pass
the same economic test.
Property Research
Use comparable properties to understand the market.
Asking price alone does not tell you property value.
AREA
Stay Close
Start with nearby comparable properties when practical rather than using properties from unrelated neighborhoods.
TYPE
Compare Similar Property
Bedroom count, bathroom count, size, condition and property type should be reasonably comparable.
DATE
Prefer Recent Activity
More recent sales and rental information may better reflect current market conditions.
Example Search
Turn the calculator result into a buying filter.
| Underwriting Item | Example | Search Filter |
|---|---|---|
| Target Market | Memphis | Search only selected target neighborhoods / ZIPs |
| Bedroom Count | 3 Bedroom | Search primarily for 3-bedroom properties |
| Expected Rent | $2,100 / month | Use as preliminary underwriting income |
| Maximum Modeled Offer | $130,000 | Focus search at or below the modeled acquisition range |
| Rehab Budget | $10,000 | Reduce offer if property-specific rehab exceeds the assumption |
Example only.
These numbers are not recommendations
for any specific property
or market.
Use actual local rent,
expense,
condition
and financing information
for each property you evaluate.
Screen the Property Quickly
Every property should answer five questions.
What Will It Rent For?
Verify the income assumption
for this specific property.
What Will It Cost to Operate?
Replace estimates
with property-specific expenses.
What Does It Need?
Determine immediate
and near-term repair requirements.
How Will It Be Financed?
Use realistic loan terms
and acquisition costs.
What Is My Maximum Offer?
Re-run the reverse-engineering calculator
using the actual property numbers.
Does the Seller's Price Fit?
Compare your number
to the seller's expectations.
Can the Deal Be Restructured?
Price and financing terms
may both affect the economics.
Should I Walk Away?
No property is mandatory.
A bad deal can simply remain someone else's property.
Section 8 Curriculum
Lesson 6 complete.
You now know how to establish your buying criteria before searching for properties.
Previous Lesson
Review Small Area Fair Market Rents and how location can affect rent research.
Run Your Numbers
Determine your maximum modeled offer before you begin negotiating with sellers.
Next Lesson
Learn how rent and operating expenses become NOI and investor cash flow.
Build Your Acquisition File
Use the Section 8 Workbook while researching properties.
Record the assumptions and research behind each property instead of trying to keep every number in your head.
- Property address
- ZIP code
- Bedroom count
- Rent research
- Expense estimates
- Rehab scope
- Financing assumptions
- Maximum offer price
Ask Luna
Need help deciding what to research next?
Luna can point you toward the relevant SSBS lesson, calculator or Section 8 resource.
Street Smart Acquisition Rule
Find properties that fit your number — not numbers that fit the property.
Research the rent. Estimate the expenses. Set your cash-flow target. Understand the financing. Calculate your maximum offer. Then search for properties you can buy within that model.
Do not fall in love with inventory.
Another property will come along.
Protect the economics first.