Capital Deployment, or Don't Listen to the Guy With the Convertible and the Bluetooth Headset

As I have mentioned in prior posts, the most difficult part of this real estate business used to be finding the really great deals. I remember just 14 short months ago how I lost two consecutive deals because I ended up getting outbid on both, and that the prices of both of those properties had risen several thousand dollars over my original offer price in the bidding process. I can also remember thinking that at the prices the winners paid neither looked like a particularly good deal. And it turns out that I may have been right, as one of them is still on the market.

Today though things are quite a bit different. One of the striking differences is with realtors. It used to be that they would always posture you and tell you that there were multiple offers whether there were or not in an effort to bid up prices. A few even refused to submit offers that seemed too low to them. And they often didn’t even return phone calls.

Well that has all changed, at least for most of them. I’m now getting calls FROM realtors asking if I’m interested in heavily discounted prime homes in move-in condition, some of which still have the sellers living there.  And there’s not a foreclosure, pre-foreclosure, or short sale in the bunch.

Not only that, but the sellers have told them to tell me that they just want to unload. Talk about a quantum shift. My hit rate over the last two months is 5 for 6 – I made six offers and had five accepted. I’ve had to throttle back my marketing somewhat because of the opportunities. There just aren’t any retail buyers out there.

But this has presented a wonderful NEW problem to deal with. And that’s which properties to buy. For example, right this minute I’m tracking four properties that I want to buy, and that I would buy, if I had the funds.

The problem is, I only have the cash for two of them.

I know I can buy any of the four for the price that I want (I pre-negotiate prices before I even go out to see homes most of the time). All four will cash flow nicely after I pull all of my money out when I refi. So – which to choose?

What this really comes down to is a question of capital deployment.

Most investor’s eyes glaze over when I start talking to them about this. But this is a VERY important concept that EVERY investor should know, especially in this market.

Why? Because there are simply too many choices out there in the market. And that can be as bad as not having enough choices.

Why? Let me give you an example. There’s a realtor that works one of my areas that fancies himself as THE realtor for investors. You know the type – drives a red convertible and has a Bluetooth headset stuck in his ear 24 hours a day, and pitches every deal like it’s the one that’s going to let you retire.

Well this guy has been spamming me with crappy deals now for some time. Close to 8 mile, need $8,000-$10,000 in rehab, low rents, and on crappy streets where only section 8 renters will rent. But they’ll cash flow. Barely, but they will.

Now I have to admit, 14 months ago when they were hard to find I would have taken notice and paid some attention to them. But now? No chance. You tell ME which is the better deal:

Door Number One
3 bedroom 1 bath bungalow. Needs $10,000 in rehab, maybe more because the utilities are turned off so you can’t inspect the plumbing, electrical, ac, or furnace. Rent heavy street, will rent for $800 to a section 8 renter. Purchase price: $57,000.

Door Number Two
3 bedroom 1 bath ranch.  Needs $3,000 in rehab for new carpet and paint because the sellers, who still live there, are smokers. Owner occupied street, will rent for $900. Purchase price: $63,000.

The kicker? They are on the SAME STREET.

These are both actual examples. Bluetooth convertible guy is pitching Door Number One, and Door Number Two is a property that I’m actually buying. Is the choice really that difficult? I didn’t think so. My realtor friend, however, doesn’t get it.

But think about it. Both properties will cost about the same when they’re done, but their ROI’s couldn’t be more different. With Door Number One you have holding costs while you rehab. Not so with Door Number Two. When you rent Door Number One you earn $100 less per month than Door Number Two. And with Door Number One you’ll probably get less price appreciation than with Door Number Two.

I recall from my corporate finance days that the optimal investment strategy was for an organization to deploy it’s capital to the place where it would generate the highest returns, and that the organization was supposed to continue doing that until they either ran out of capital to invest or they ran out of positive return projects to invest in. The same is true in the real estate market today.

But what it really comes down to is math. As much as everyone hates to admit it, this business is all about the math. And one math principle in particular – ROI. It should guide you every time you decide to invest.

 

 

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